What should be included in a Settlement Agreement? Key clauses explained

If you’ve just been handed a settlement agreement, you’re probably wondering whether it’s fair, whether you have to sign it, and what the various clauses actually mean for you. You may also be up against a deadline. This guide is designed to answer those questions in plain English.

A settlement agreement is a legally binding contract between an employee and employer. It typically records the terms on which the employee’s employment ends, with the employee receiving a compensatory payment in return for agreeing to waive any legal claims they may have against their employer.

Under UK legislation, for a settlement agreement to be valid it must:

(a) Be in writing
(b) Refer to particular claim(s) or proceedings which are being waived
(c) The employee must receive advice on the terms and effect of the agreement from a relevant independent advisor (e.g. a solicitor)
(d) The agreement must specifically name the advisor

In addition to this, an employee should expect to see the following key clauses in a settlement agreement:

1) Termination of employment

You would expect a settlement agreement to contain a clause concerning the termination of the employee’s employment (where this is relevant). In particular, the clause should confirm:

• The date the employee will be leaving the company.
• Whether the employee is required to work their notice or if they will receive a payment in lieu of notice.
• Whether the employee will continue to work as usual up to the termination date, and how they will be paid during this time (usually, an employee working up to their termination date will be paid as usual and continue to receive contractual benefits)

2) Termination payment

Typically, an employee will receive a compensatory payment from their employer, in exchange for agreeing to waive any claims they may have against their employer. This is often referred to as a termination payment or compensation payment.

The clause governing this payment should clearly set out the amount the employee will receive and confirm how this payment will be taxed. Termination payments which are below £30,000 are typically treated as tax free. Anything exceeding this amount will be subject to tax. The clause should also confirm when the termination payment will be made – typically this will be around 14-28 days following the termination date.

3) Waiver of claims

The crux of these agreements is that the employee agrees to waive their rights to bring specific legal claims against the employer that may have arisen in connection with their employment or its termination. The agreement will typically include a long list of employment related claims the employee is waiving, including unfair dismissal, breach of contract and discrimination claims. Once an employee signs the agreement, they are giving up their right to pursue these claims.

Employees will want to make sure the waiver is restricted to employment-related claims and does not extend beyond what is reasonable.

4) Confidentiality provisions

Most well drafted settlement agreements will contain a clause concerning confidentiality. Typically, this will prevent the employee from disclosing the existence or terms of the agreement and is sometimes extended to the circumstances leading up to the agreement. There will be certain carve outs to this for both employers and employees. For example, for employees, they are often allowed to make disclosures to immediate family members, prospective employers or as required by law. The agreement should also confirm that the parties are not prevented from making a protected disclosure i.e. whistleblowing.

In practice, this means you should check the wording carefully before posting anything about your departure on LinkedIn or discussing the circumstances with former colleagues, even a vague post could be caught by a broadly drafted clause.

5) Non-derogatory statements

Typically, a settlement agreement will prevent both parties from making negative statements about one another or doing anything which might damage the other parties’ reputation.

For example, this clause would typically prevent you from leaving a negative review of your former employer online or making critical comments to future business contacts. Equally, it binds the employer, and they cannot make disparaging remarks about you to prospective employers.

6) Legal fee contribution

Under UK law, a settlement agreement is only valid if the employee receives advice on its terms and effects from a relevant independent advisor (e.g. a solicitor). It is common practice for an employer to contribute towards the cost of this advice.

Employer contributions typically range from £400 to £750 plus VAT, though the cost of advice will depend on the complexity of your agreement. If the contribution offered does not cover the full cost, this is something your solicitor can seek to negotiate with the employer before you sign. You are entitled to independent advice from a firm of your choice.

7) Entire agreement

The agreement will usually contain a clause confirming that the agreement supersedes any other agreements (whether oral or verbal) concerning the employee’s termination. This prevents either party from relying on any assurances made outside of the agreement. For employees, it’s crucial to ensure everything important is included as a term of the agreement.

Whilst the termination payment is often the most important aspect of a settlement agreement for an employee, the remaining clauses are crucial in shaping how the employee’s employment comes to an end, what they can say about it, and what obligations continue after termination. As above, for a settlement agreement to be valid in an employment context, an employee must receive independent advice on its terms and effect. Your legal advisor will be able to help you understand the clauses in the agreement and whether they are fair and in your best interests.

Not sure if your agreement is fair? We can help.

Settlement agreements often come with tight deadlines and the stakes are high. If you’ve received an agreement and want to understand whether the terms are fair or whether there is room to negotiate our employment team is here to help. Get in touch for a confidential conversation.

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