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Insights // 23 August 2020

What is a Settlement Agreement and What Should It Contain?

Solicitor Andrea Corr, in our Employment Law team, explains settlement agreements and what is included in a settlement agreement.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee in order to terminate employment. It may be offered as part of a redundancy situation but may also be offered by the employer (or sometimes, the employee) in an “off the record” or protected conversation to achieve a mutually agreeable exit. Any settlement agreement will require the employee to waive all of their employment rights, most notably unfair dismissal and discrimination claims, in exchange for a compensation payment. For a settlement agreement to be valid, legal advice must be sought. 

Terms of a settlement agreement

A settlement agreement will usually contain various types of payment. These include:

  • Any outstanding entitlement to notice;
  • Any accrued but untaken holiday;
  • A compensation or ‘ex gratia’ payment.

The compensation acts as the incentive for the employee to sign away their employment rights.

The tax treatment of the payments will differ accordingly and it is important to review this as the employee will usually indemnify the employer for any excess tax issues. The first £30,000 of any genuine compensation payment will generally be paid tax free (inclusive of statutory redundancy pay).

Other clauses within the settlement agreement will typically include:

  • Warranties and indemnities;
  • Confidentiality and other restrictions;
  • Reference.

The employer will usually contribute an amount towards legal fees. An employee can choose to accept and sign the settlement agreement, may decide to negotiate with the employer on terms and/or the amount the employer is offering as compensation or can refuse to sign the settlement agreement. All of these options can be discussed with the employee’s legal adviser. 

For further information or legal advice, please contact or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Andrea Corr

Andrea Corr

Senior Solicitor, Employment Law

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