Settlement Agreements: what to check before you sign
A settlement agreement is a legally binding contract between an employer and an employee, typically used to end employment (or resolve a workplace dispute) on agreed terms. In most cases, the employee receives an agreed financial package and certain non-financial terms (such as a reference) and, in return, agrees not to bring specified employment claims.
In Clifford v IBM United Kingdom Ltd [2024] EAT 90, the Employment Appeal Tribunal upheld that a properly drafted qualifying settlement/compromise agreement can preclude later discrimination claims – reinforcing the importance of clear wording (and meeting the statutory requirements).
Why independent legal advice matters
To validly waive most statutory employment claims, a settlement agreement must meet specific legal requirements. This includes that it is in writing, relates to a specific complaint/claim, identifies an independent adviser, and confirms the adviser is insured (among other requirements). This is why employers often contribute to the employee’s legal fees for advice.
Common issues we see
A frequent issue is that figures are presented as a “package” when some elements may simply be contractual or statutory payments the employee would receive anyway. It is important to identify what is genuinely being offered in return for the claims waiver.
Termination payments can also be taxed differently depending on how they are structured (for example, notice pay/PILON is typically taxable). A careful review should ensure the tax clauses reflect the intended treatment and do not leave either party exposed to unnecessary risk.
It is also important to check post-termination restrictions (any new or widened restriction should be treated with caution), and the scope of the waiver, warranties and any repayment/clawback provisions.
Negotiation: what can often be improved?
Depending on the circumstances, it may be possible to negotiate:
- the overall value (or structure) of the payment
- the reference wording
- the reason for departure/announcement wording
- confidentiality scope
- legal fees contribution
- the scope of any restrictions
How we can help
We advise employees and employers on settlement agreements by:
- reviewing the agreement alongside the contract and relevant documents
- explaining key clauses in plain English
- assessing whether the offer is reasonable in context
- negotiating improvements where appropriate
- providing the independent advice certificate required for validity
If you would like advice on a settlement agreement, please contact Lewis Nedas Law’s Litigation Department to arrange an initial consultation.
Author: Sebastian Roberts,
Litigation Department
Contact Lewis Nedas Law via our enquiries page or by telephone on 020 7387 2032