Settlement Agreements – What Employers need to know

Settlement Agreements are often used to bring an employment relationship to an end where a mutual parting of ways is preferred over a compulsory dismissal. It is a legally binding contract between an employee and employer which usually gives the employee money in return for their agreement not to sue the employer.  Settlement Agreements can also provide an invaluable way of resolving a dispute; including where the employment relationship is ongoing.

Many employers assume a standard template is sufficient to get the job done.  However, no two employment scenarios are the same.  To guarantee business protection, the terms of the agreement should be bespoke to ensure the document captures everything agreed and compromises claims effectively.  Here are some common misconceptions around Settlement Agreements:-

Assuming £30k can be paid tax free

It’s a myth that employers can always pay the first £30k of a termination payment on a tax free basis.  The £30k exemption only applies to payments that are not payments of earnings and so every payment under the agreement will need to be considered separately to determine its tax status.

Misunderstanding the use of confidentiality clauses

There is a legitimate place for confidentiality clauses in some instances however the use of them has come under considerable scrutiny over the past few years.  Confidentiality clauses must be carefully drafted and should not be used to intimidate victims of harassment and discrimination or to prevent an individual making a disclosure to the police, regulated healthcare professionals or legal professionals.

Assuming all claims can be waived

Not all employment claims can be compromised under a settlement agreement.  Some claims, such as claims for failure to inform and consult under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’), can only be settled through ACAS Conciliation and some claims cannot be compromised at all. 

Misunderstanding the use of an entire agreement clause

The inclusion of an entire agreement clause means that anything agreed outside the agreement is not legally binding; this could be fatal for an employer wishing to rely on post-termination restrictions without properly reaffirming those covenants in the settlement agreement itself to ensure their business is protected.

Ignoring the statutory conditions

For a settlement agreement to be legally binding, and to constitute a valid waiver of claims, there are a number of statutory conditions that need to be satisfied.  If these requirements are not fulfilled, the agreement will be invalid and unenforceable; meaning the employee can still sue the employer.

In a climate where many employers will be faced with making difficult decisions around workforce resourcing, employers would be well advised to seek early advice on their specific circumstances. 

If you need help negotiating or drafting a settlement agreement please contact Lisa Kemp on 0345 20 73 72 8 or

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