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Settlement Agreements

Providing or Receiving a Settlement Agreement?

Providing or Receiving a Settlement Agreement?
Annalie King Employment Solicitor at Kerseys on key points to consider:-

When there is a dispute between an employee and employer, the employer may choose to use settlement agreements to resolve the issue.

Using a settlement agreement will allow you and your employee to come to an agreement about the termination of their employment (in most cases).  The settlement agreement will detail what payments the employer will make to the employee and to record any other agreement reached between the employer and the employee.  The settlement agreement will also provide you with the reassurance that the issue has been concluded without the risk of ending up in an employment tribunal or other court.

Without Prejudice Discussion/Protected Conversation

As an employer once you have decided that you would like to offer a settlement agreement to an employee, it is important that you ensure that the offer is made via a “without prejudice discussion” or as part of a “protected conversation”. The offer to settle with the employee can be made in writing or verbally.  If the employer makes the offer in a “without prejudice discussion” or as part of a “protected conversation”, this will prevent the employee from using the employers offer against the employer in a court or employment tribunal if the employee decides not to accept the settlement offer and proceed with a claim for unfair dismissal together with any other claim that the employee may have against an employer.

There is a distinction between a “without prejudice discussion” and a “protected conversation” (off the record conversation).   A “without prejudice discussion” can be held if there is an existing dispute between an employer and an employee.  A “protected conversation”, differs from “without prejudice discussions” and the employer needs to be careful as to which conversation is appropriate to have. An employer can have a protected conversation even where there is no existing dispute with an employee.  Protected conversation derive from s.111A of the Employment Rights Act (ERA) 1996.  Any discussions that have been held by way of protected conversation are inadmissible in employment tribunal proceedings under s.111A ERA1996.

At the outset of any discussion or conversation employers should make it clear to an employee that what is said is protected and/or without prejudice. The same goes for any correspondence an employer and employee may have. You can do this by stating it at the top of each letter and email.

What happens to the employee during the negotiation period?

As an employer you need to consider whether you want your employee’s employment to end immediately or at the end of their notice period.  If the employer chooses to terminate their employment immediately, then the employer should pay the employee in lieu of their notice period.   Alternatively, the employer can have the employee work their normal amount of notice.  Some employers also choose to place employees on garden leave for the length of the employee’s notice period. Whilst on garden leave the employee is expected to refrain from attending work or contacting employees or customers of the employer but is still expected to be report to work if required.

Payments under the Settlement Agreement

The settlement agreement will state what is due to the employee. This will usually include their notice pay, outstanding holiday pay and any bonus and commission payments.  These payments will have deductions for income tax and employee National Insurance Contributions made from them.

It is also usual for an employer to make non-contractual/tax free payment to encourage the employee to accept the settlement agreement.  This payment is often known as an “ex-gratia payment”.  The amount offered by the employer depends on what the employers are prepared to offer and also on negotiations between employer and the employee.  For example, if an employer is offering a settlement agreement instead of proceeding with any disciplinary measures, the ex-gratia offer may be minimal or the employer may elect not to offer an ex-gratia payment at all, depending on the circumstances. It may be enough that the employee’s employment is not being terminated due as a result of disciplinary action and as such their employment remains unblemished and this may be enough of an incentive for them to accept the terms of the settlement agreement.

Tax and tax indemnity

As already stated, income tax and employee National Insurance Contributions will need to be deducted from the payments that the employee is contractually entitled to.

The ex-gratia payment, must truly be a termination payment and can be paid to the employee without deducting tax and national insurance.  The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) is the legislation that enables the employer, to make the tax free payment to the employee. Under section 403 of ITEPA, the employer can pay the first £30,000 of the ex-gratia payment without any deductions. Any amount over that will be subject to deductions.

It is usual to include a tax indemnity clause in the settlement agreement so that the employee indemnifies the employer against employee’s contributions for any demand made by HMRC for income tax and employees National Insurance Contributions.

Returning company property

The employee may have company property that the employer requires the return of.  The agreement will provide for this and how and when the property should be returned to the employer.

Non-derogatory clauses

Given that the employment relationship with between employer and employee is coming to an end, an employer should think about including a clause that stops the employee saying anything disparaging or negative about the employer and anyone in the group (should there be group companies) together with associated persons such as employees, directors, shareholders etc.

Job reference

There is no legal obligation on an employer to provide a reference for an employee. However, it is usual practice in settlement agreements that references are included and that the employer will agree to be bound by the terms of the reference whether any enquiries that are made orally are on no less favourable terms than the written reference.  Providing for a reference in a settlement can be desirable for the employee and may be a useful negotiating tool for an employer to use when offering a settlement agreement.  Some employers only offer factual references while others will provide more detailed references.  It is important that should that the employer agrees to offer a reference for the employee that it is not a misleading reference.

Legal fees – Who pays for the employee’s legal advice?

There is no legal obligation for the employer to pay for the employee’s legal advice but as the agreement will not be legally binding unless the employee receives legal advice.  It is standard practice for the employer to make a contribution towards an employee’s legal fees because the employee must be in receipt of independent legal advice on the terms and effect of the settlement agreement for it to be legally binding. Most employers contribute between £350 and £1,500 plus VAT towards their employee’s legal fees.

Confidentiality clause

It is usual for there to be a confidentiality clause in the settlement agreement.  This means that the employee and employer agree to keep the terms of the settlement agreement confidential save for certain exceptions such as to seek independent legal advice (both parties are free to seek legal advice), for example.

Post-termination restrictions

If the employee has post-termination restrictions in their contract of employment, then the settlement agreement should refer to these restrictions and remind the employee that they are bound by them less any period of time that the employee has spent on garden leave.

Alternatively, the employer may not have any post-termination restrictions in the employee’s contract of employment. However, as an employer you should consider whether you need to restrict your employee by way of post termination restrictions to prevent them from poaching your clients, customers, employees and/or suppliers.  If you do want to include post-termination restrictions, the more narrowly drafted the restrictions are together with a sufficient period of time, the stronger your chances are of enforcing them. Fresh consideration (a payment) should also be offered if you are introducing post-termination restrictions for the first time.

Waiver of claims

In the settlement agreement the employee is agreeing to settle all and any claims that they may have against the employer, with the exception of accrued pension rights, claims for any unknown personal injury and the right to enforce the settlement agreement, as well as whistleblowing claims. As an employer think about whether there are any particular claims that the employee may have, and these can be specifically set out in the settlement agreement.


If you have any questions or need employment law advice or HR support, please don’t hesitate to contact us for a friendly chat about what your requirements are.

If you are in of need employment advice or HR support contact Kerseys Solicitors in Ipswich 01473 213311 or Kerseys Solicitors in Colchester 01206 584584, or email [email protected], alternatively Kerseys are only a click away on or visit our website and click “Call Me Back” a member of our employment team will be happy to contact you at a time that is convenient to you.

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