Employee Settlement Agreements

A Settlement Agreement is a legally binding contract between an employer and an employee that solidifies the terms under which a dispute or employment relationship is terminated.  
The employee waives their right to bring legal claims against the employer in the future, in exchange for a financial payment or other agreed benefits. 

Once signed, the agreement becomes legally enforceable, which is why it is recommended that both parties have independent legal advice before it is finalised. Often, the employee taking independent legal advice on the terms of the settlement agreement is an essential part of the agreement.  

The key to any fair agreement is clear and precise terms. Employers should ensure every key term is precisely defined – from payments and bonuses to notice periods, benefits, and reference wording. The best practice is to double-check that the final document mirrors what was agreed during negotiations. For example, if the employee is being paid in lieu of notice, the agreement should specify this clearly and then confirm how the amount has been calculated. Transparency and clarity protect the employer and the employee alike, shifting the process from a potential heated process to a mutually beneficial arrangement. If you need clarity or reassurance, Glaisyers ETL can guide you through every step. 

A settlement agreement’s main appeal from an employer’s perspective, is, of course, the elimination of any future legal claims; however, there are certain rights for which claims cannot be legally waived, such as those for future personal injury or accrued pension rights. The agreement, therefore, should clearly list which statutory and contractual claims are being waived (such as unfair dismissal or discrimination). Overly broad waivers leave room for exploitation and could even invalidate the agreement altogether. By striking out a balance between comprehensive coverage and lawful drafting, employers can ensure genuine finality and overall peace of mind. 

Most settlement agreements include confidentiality clauses to   protect business interests. It’s essential, however, to keep this element realistic and not so broad that it becomes unenforceable. In some cases, employers may also wish to add or reiterate restrictive covenants. If the contract of employment did not contain restrictive covenants and they are only introduced as part of the settlement agreement, the employee should receive further consideration (such as a payment or benefit) for agreeing to it. Examples of restrictive covenants might include a non-compete clause that prevents the employee from working for a competitor for a given period after leaving, or a non-solicitation clause that prevents the employee from poaching the company’s clients, customers, or staff.  

These restrictions must be reasonable and proportionate, meaning they must:

• Cover only a fair geographic area  
• Last for a limited time  
• Relate specifically to the employee’s role and what needs protecting  

Restrictive covenants can help the company stay protected after the employee leaves and ensure a fair exit procedure for all involved.  

Likewise, an employer might choose to waive a contractual restrictive covenant as part of the settlement package offered. This can incentivise an employee to enter into a settlement agreement and if this is agreed, it needs to be accurately reflected in the agreement itself.  

Even the most carefully worded agreement won’t be legally binding unless the process is followed correctly. Employers must allow the employee to seek independent legal advice from a qualified adviser and give them sufficient time to do so (and often the employer pays a contribution towards this advice as part of the settlement of terms). Pressuring an employee to sign quickly or failing to document discussions properly could render the agreement invalid and also frustrate the employer/employee relationship. Employers should also ensure that protected conversations, and discussions surrounding settlement agreements, remain discreet and confidential. A well-managed process ensures that both the employer and employee understand and are comfortable about next steps.   

Ex-gratia payments are generally tax-free up to £30,000, but payments such as contractual notice pay and bonuses are taxable through PAYE and will therefore have tax and National Insurance contributions deducted. Clearly outlining the tax status of each payment in the agreement ensures both parties understand what the employee will receive and ensures that the settlement agreement is compliant. Finally, while logistics like the return of company property, garden leave, and handover responsibilities might seem less important, it is essential that anything agreed is formally recorded in the agreement. This helps prevent complications later and ensure that each party is aware of their ongoing obligations, leaving no room for dispute.  

You can expect every situation like this to be as unique as the individuals involved, so expert advice can be crucial when navigating settlement agreements. Taking these steps reduces the risk of legal claims and disputes, protects the business and creates a clean break for everyone involved.