Settlement agreements are commonly used by employers and employees in the UK to resolve workplace issues and, usually, bring employment to an end on agreed terms. If you have been offered a settlement agreement, it is important to understand your rights and the legal implications before signing.
Below we answer some of the questions our clients usually ask us about.
Are settlement agreement payments taxable?
A settlement agreement often includes several different types of payments, each of which may be treated differently for tax purposes:
- Salary, wages, holiday pay and bonuses (all the payments up to the point the employment contract ends)
These payments are fully taxable and subject to Income Tax and National Insurance contributions. - Payment in lieu of notice (PILON)
PILON is generally taxable. - Compensation for loss of employment (ex gratia payment)
The first £30,000 of genuine compensation for termination of employment is usually paid tax-free. Any amount above £30,000 is taxable.
When can a settlement agreement be offered?
An employer may propose a settlement agreement in a wide range of circumstances, including:
- redundancy or planned dismissal
- workplace disputes
- restructuring or business reorganisation
- change of employment terms
- performance or conduct issues
- situations where both parties wish to end the employment relationship amicably.
Do I have to sign a settlement agreement?
Settlement agreements are voluntary. You are not required to sign the agreement and are entitled to refuse the offer, or negotiate the terms, including the level of compensation, notice arrangements, references and confidentiality provisions.
Do I always need independent legal advice? I agree to sign the settlement agreement!
For a settlement agreement to be legally valid, the employee must receive independent legal advice from a qualified and insured adviser, usually a solicitor.
Alternatively, advice may be provided by a certified trade union representative, or an authorised advice worker permitted to advise on settlement agreements.
Our employment solicitors at IMD are fully qualified and insured to provide the required advice.
What claims do I waive by signing a settlement agreement?
By signing a settlement agreement, an employee usually agrees not to bring legal claims against the employer, including claims for unfair dismissal, discrimination or unlawful deduction from wages, and the agreement must clearly list the claims being waived. Depending on the circumstances, the agreement may also waive personal injury claims where symptoms existed at the time of signing. Importantly, a settlement agreement does not prevent an employee from enforcing the terms of the agreement itself if the employer fails to comply.
Are settlement agreements confidential?
Most settlement agreements include confidentiality clauses covering the terms of the agreement and the circumstances surrounding the terms of the employment. Therefore, you should not discuss it as otherwise you may be in breach. There are usually limited exceptions, for example disclosures to legal advisers or HMRC.
Can I change my mind after signing?
Once a settlement agreement has been signed and all legal requirements are met, it becomes legally binding. There is usually no automatic cooling-off period, which is why taking legal advice before signing is essential.
Can a settlement agreement include a reference?
Settlement agreements often include provisions relating to references. Employees may negotiate whether a reference will be provided, and the form or wording of that reference.
In practice, references are commonly factual only, confirming details such as job title, dates of employment or working hours. Any agreed reference should be clearly set out in the agreement.
Need advice on a settlement agreement?
If you have been offered a settlement agreement, our employment law solicitors can provide clear, independent advice and help you understand it before you sign.
Call us: 0330 107 0107
Email us: info@imd.co.uk
