Settlement Agreement Solicitors
Settlement agreements can be instrumental in ending an employment relationship on fair terms. If your business is struggling with the complexities of legally binding agreements, or unsure of how to calculate fair compensation, JMW’s expert settlement agreement solicitors are here to help you navigate these challenges with confidence.
Ensuring a settlement agreement is enforceable and fair requires a clear understanding of employment law, particularly around confidentiality, compensation and post-termination restrictions.
At JMW, our team brings years of experience in helping employers craft valid settlement agreements that align with legal standards and protect business interests. From drafting and negotiating terms to handling complex situations involving senior executives, we are equipped to provide the expert guidance you need to help you achieve a legally sound, fair, and efficient resolution.
To discuss your settlement agreement needs, contact us today on 0345 872 6666 or use our online enquiry form.
What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee, typically used to end an employment relationship under mutually agreed terms. These can be a powerful tool that allows employers to end employment amicably, protecting against future claims and safeguarding sensitive business information.
These agreements are commonly used to avoid disputes and safeguard against employment tribunal claims, providing the employer with a clean break while offering the employee fair compensation.
This solution is particularly useful in scenarios involving redundancies, workplace grievances, or mutual separations where both parties wish to avoid further disputes.
Compromise agreements were the former term for settlement agreements in UK employment law. Although the terminology has changed, the concept remains the same: providing an alternative to litigation by offering a mutually agreed settlement.
Today, settlement agreements encompass a broader scope, with additional protections under current employment law, which benefits both the employer and employee.
Why Employers Use Settlement Agreements
Employers use settlement agreements to manage exits smoothly and legally, reducing the risk of employment tribunal cases, protecting confidential information, and preserving business reputation. Common situations for using these agreements include redundancies, termination due to performance issues, or to resolve disputes related to unfair dismissal claims.
By using a settlement agreement, employers have an opportunity to outline specific post-termination restrictions, address potential concerns about disclosure of sensitive company information, and include agreements on notice periods and final payment terms.
What Are the Benefits of Using a Settlement Agreement?
A well-drafted settlement agreement can prevent former employees from filing future claims related to their employment, such as unfair dismissal or discrimination claims. This is particularly beneficial for employers seeking to avoid the time and legal costs associated with employment tribunal hearings.
Ensuring protection against future claims allows the business to continue operating without the risk of costly legal distractions. Additionally, a well-structured agreement helps employers uphold a positive reputation within their industry by showing they handled employment issues professionally.
Additionally, many settlement agreements include confidentiality clauses and non-disparagement terms to protect sensitive information and maintain a positive reputation. This ensures former employees cannot disclose company data or make public statements that may harm the business.
Confidentiality clauses are especially important if the employee had access to client lists, trade secrets, financial information or proprietary data, as these clauses prevent potential misuse of this information by former employees or competitors.
A settlement agreement also helps protect ongoing client relationships, ensuring smooth transitions without compromising the employer's reputation.
What Are the Key Elements of a Legally Binding Settlement Agreement?
Requirement to seek independent legal advice
To make a settlement agreement legally binding, UK law requires the employee to obtain independent legal advice. This ensures the employee fully understands the terms and implications of signing the agreement, which is crucial for its enforceability.
Typically, employers cover legal fees for the employee’s advice as part of the settlement package. By supporting the employee in obtaining this advice, employers contribute to creating a fair and transparent process, showing good faith and increasing the likelihood of a mutually agreeable outcome.
This legal advice also prevents future challenges from employees who may later claim they did not understand the terms.
Essential terms in settlement agreements
A settlement agreement contains essential terms, including details of the termination payments, confidentiality clauses, notice periods and a waiver of claims. It may also outline an agreed-upon reference that the employee can use for prospective employers.
Some agreements may specify that the employee will receive a lump sum, continue with certain benefits for a set period, or agree on other financial considerations, such as retaining a company car.
For employers, clarity in these terms helps minimise misunderstandings and disputes later. Ensuring that all terms are properly documented also strengthens the agreement's enforceability, making it clear what both parties are bound by.
Making it legally enforceable
For a settlement agreement to be enforceable, it must be in writing, clearly specify the agreed terms, and be signed by all parties. The agreement should relate to specific proceedings or complaints. The employee must receive advice from an independent legal adviser on the terms and effect of the agreement. This adviser must be a qualified lawyer, such as a solicitor or barrister, or a certified union representative. Following the signing, both the employer and employee should retain copies of the finalised document.
Courts are more likely to uphold a settlement agreement if it has been properly executed, particularly where the terms are fair and both parties had the chance to review the agreement.
Types of Clauses in Settlement Agreements
Confidentiality clauses are important in settlement agreements to prevent former employees from disclosing sensitive information. Non-disparagement clauses, meanwhile, prevent negative statements that could impact the business's reputation.
These clauses are not just protective measures for the employer, but also a way to ensure that the terms of the employee’s departure remain private, which is often preferred by both parties.
Confidentiality clauses cover a range of information, from trade secrets to general internal affairs, ensuring sensitive topics remain protected.
Post-termination restrictions, such as non-compete and non-solicitation clauses, are also sometimes included to prevent former employees from joining competitors or soliciting clients. These post-termination restrictions protect business interests, especially in competitive sectors. They are particularly useful for employers in industries where client retention and sensitive information are at high risk of exploitation.
These restrictions often have specified time limits and geographic scopes to ensure they are reasonable and legally enforceable, striking a balance between protecting the business and allowing the former employee to find new work.
Calculating Compensation for a Settlement Agreement
Compensation for settlement agreements varies based on factors such as the employee’s role, tenure, and whether the exit involves a redundancy process. For high-level or long-tenured roles, a compensation payment may be higher to reflect the value of the employment relationship.
Compensation often also considers the potential claims the employee may have, so offering an amount that fairly addresses these risks is important. In cases where disputes exist, an increased compensation offer can lead to quicker, less contentious resolution.
Non-financial benefits, such as continued health insurance, outplacement services, or a positive reference, can be added to the settlement package. These additions offer additional security to the employee, ensuring they feel supported in the transition. Such support can make the settlement offer more attractive to employees, reducing the likelihood of them pursuing further claims.
This also reassures the employee that their contributions to the company were valued, and provides them with tools to help in their next career steps.
Tax implications and National Insurance contributions
The tax implications of settlement agreements can be complex. While the first £30,000 of a termination payment is often tax-free, other payments may be subject to income tax and national insurance contributions.
Employers should consult with their settlement agreement solicitors to ensure tax compliance and proper reporting of all amounts. Accurate tax handling ensures compliance with HMRC regulations and reduces the risk of unexpected tax liabilities for both parties.
Why Seek Legal Advice on Settlement Agreements?
Engaging legal advice when drafting and finalising settlement agreements is critical for protecting an employer’s interests while ensuring compliance with UK employment law.
Here’s why consulting with expert solicitors is invaluable:
- Ensuring legal compliance and binding terms: A settlement agreement must meet certain legal standards to be enforceable. Experienced solicitors ensure that every clause, from confidentiality clauses to compensation terms, is crafted to be legally sound, protecting the employer from potential disputes.
- Mitigating legal risks and preventing claims: With proper legal advice, employers can address any potential claims before they escalate. Legal experts can tailor settlement agreements to meet specific needs, helping minimise the risk of employment tribunal claims and other legal actions.
- Managing financial and tax considerations: Solicitors can guide employers on structuring termination payments to ensure tax efficiency and compliance, advising on national insurance contributions and the tax-free limits for compensation payments. Please note that solicitors are unable to provide specific tax advice.
- Confidentiality and post-termination protections: Specialist solicitors help draft confidentiality clauses, non-disparagement terms, and post-termination restrictions that protect sensitive business information and ensure the employee cannot damage the business post-departure.
Seeking legal advice ensures that settlement agreements are fair, clear and enforceable, giving employers the peace of mind that they’re fully protected.
Why Choose JMW?
JMW have extensive experience in employment law, assisting employers across various industries in crafting employment settlement agreements.
Our solicitors understand the complexities of employment law and use that expertise to provide practical solutions that address each employer's unique challenges. From drafting and negotiating terms to handling tribunal claims, we provide tailored solutions that meet both legal and business standards.
We recognise that each employer’s situation is unique. We provide practical, fair resolutions designed to protect your business interests while upholding compliance with all relevant employment laws.
Our professional service focuses on clarity, efficiency, and enforceability, ensuring that every settlement agreement we create supports your specific goals, whether for redundancies, performance-related exits, or resolving disputes with minimal disruption.
Talk to Us
For guidance on drafting a settlement agreement that meets your needs, contact JMW’s expert team on 0345 872 6666, or complete our online enquiry form.
Settlement Agreement FAQs
- What is the purpose of a settlement agreement?
A settlement agreement is a formal way to bring an employment relationship or dispute to an end with clear, mutual terms. It ensures that both parties agree to the terms of departure, offering the employee financial compensation while safeguarding the employer from future disputes.
Employers find this particularly valuable as it provides legal protection and a structured, positive resolution to sensitive employment matters. For employees, the agreement represents a secure financial package and often an agreed reference, which can be beneficial in their future career pursuits.
- Do I need independent legal advice to draft a settlement agreement?
While employers are not required to seek legal advice themselves, employees must receive independent legal advice for the settlement agreement to be enforceable. This is mandated by UK law to protect the employee’s rights, ensuring they fully understand the agreement’s terms before signing.
Covering this legal cost is standard practice, as it streamlines the process and helps avoid misunderstandings that could lead to legal challenges in the future.
- What happens if the employee refuses to sign the settlement agreement?
If an employee declines to sign the agreement, the employment ends without the protective terms and benefits outlined in the document. This means the employee retains the right to make claims against the employer, including bringing a tribunal claim.
Employers can attempt to renegotiate terms or clarify any areas of concern, but forcing a signature is not legally possible. In cases where resolution cannot be reached, the matter may proceed to formal legal proceedings.
- What are the tax implications of a termination payment?
In the UK, the first £30,000 of a settlement payment is generally tax-free, but any additional amounts, as well as pay in lieu of notice, are subject to income tax and national insurance.
Employers can clarify the tax treatment of different elements within the agreement to ensure compliance. This clarity helps to avoid potential tax disputes or unexpected liabilities for both parties.
- What is a confidentiality clause in a settlement agreement?
A confidentiality clause is often included to ensure the employee does not disclose sensitive information or discuss the terms of the settlement. This protects company details, trade secrets and reputational interests.
The clause might also cover restrictions on what the employee can say to colleagues, clients, or in public about their departure. Maintaining confidentiality benefits both parties by creating a private and controlled exit arrangement.
- How does a tribunal claim impact a settlement agreement?
If a tribunal claim has been filed, the settlement agreement can be used to settle the matter outside of court. Once signed, the employee must withdraw their claim, which provides the employer with assurance that no further action will be taken on that issue.
This method is commonly pursued because it saves time and costs compared to a tribunal hearing, allowing for a definitive and private resolution.
- What are the typical legal costs involved in a settlement agreement?
Legal fees vary but are influenced by the complexity of the agreement and the employee’s level of seniority. Employers usually cover the legal fees for the employee’s required legal advice, which facilitates the signing process and shows good faith in supporting the employee’s understanding of the terms.
In some cases, employers also incur costs for drafting and negotiating terms, which a solicitor can help manage to keep expenses efficient.
- What should be included in an agreed reference for prospective employers?
An agreed reference is a neutral statement about the employee’s role, typically covering their job title and dates of employment. The purpose is to provide the employee with a useful reference without causing reputational harm to either party.
Including an agreed reference within a settlement agreement is often viewed as a fair practice, especially for employees who are transitioning to a new role and wish to avoid any potential barriers to future employment.
- Can a settlement agreement include a non-compete clause?
Yes, non-compete clauses can be part of a settlement agreement, especially if the employee held a senior position or had access to sensitive business information.
Such clauses aim to prevent the employee from working with a competitor or soliciting former clients for a set period. These restrictions must be reasonable in scope and duration to be enforceable and should be tailored to balance the employee’s right to work with the employer’s need to protect their interests.
- What if an employee breaches the settlement agreement after signing?
If an employee breaches the agreement, the employer may have legal grounds to take action. Remedies might include seeking financial damages, reclaiming part of the settlement payment, or obtaining an injunction to stop further breaches.
Having detailed, enforceable terms within the agreement strengthens the employer’s position in addressing such breaches, providing a structured path for recourse if terms are not upheld.
- What additional protections can I include in a settlement agreement?
Employers can include protections such as requirements for returning company property, provisions for the secure handling of client information, and limitations on contacting other employees post-departure.
Tailoring these protections to your business’s specific needs helps ensure ongoing stability and security, reducing the risk of negative impacts after an employee leaves. This is particularly beneficial in highly competitive industries, or roles involving high-value clients or proprietary information.
