What are the Common Terms of a Settlement Agreement?

What is a settlement agreement?

Employers and employees often use legally binding contracts known as settlement agreements to resolve workplace disputes or simply to record the terms of an amicable parting of ways.

Formerly known as a compromise agreement, settlement agreements are used to deal with exits that occur for a number of reasons, including redundancies, ill health, performance issues, conduct and more. They can also be referred to as a termination agreement or a severance agreement.

At Smith Partnership, our dedicated employment team advises employees on every aspect of the settlement process, ensuring they enter settlement agreement negotiations from a position of strength so as to settle on the best possible terms.

What are the terms of settlement?

Set out below are some key terms used in settlement agreements and the negotiation process and what they mean.

1. Protected conversation

(Known also as “pre-termination negotiations” or “without prejudice discussions”) is a term given to a meeting held between an employee and employer which may be protected from being used in any subsequent unfair dismissal proceedings unless there is “improper behaviour” on the part of the employer. Employer’s will usually mark communications and begin meetings by saying it is protected under section 111A of the Employment Rights Act 1996 or that it is “Without prejudice & subject to contract” until a settlement is reached.

2. Termination payment/ex gratia payment

Also sometimes referred to as a severance payment or enhanced redundancy payment, ex gratia is a payment made to employees upon their termination.

3. Notice payment/PILON

The notice period payable to an employee under their contract of employment, where the employer pays the notice as a lump sum, rather than requiring the employee to work this notice.

4. Waiver of claims

When signing a settlement agreement, an employee will be waiving their rights to bring any employment-related claims against their employer.

5. Independent adviser

The law surrounding settlement agreements requires that employees must have independent legal advice in order for a settlement agreement to be binding.

6. Without prejudice

This will usually be included in the agreement to try to ensure that it will be inadmissible in any court or employment tribunal proceedings if an agreement is not reached with the employee, as mentioned above.

7. Confidentiality

Usually there will be a clause in the agreement which means that an employee should keep any confidential information that was gained during employment confidential going forward.

8. Non-disclosure

In settlement agreements, there will usually be a clause whereby employees cannot tell anyone about the existence or terms of the settlement agreement once it is signed, including the circumstances leading up to the signing of the agreement and the employee’s termination.

9. Derogatory comments

Employees will usually be bound by a clause in the settlement agreement which prevents them from making any adverse or derogatory comments about the employer, directors or other employees. This can also be reciprocal, if the employee has concerns that anyone at the company may cause them reputational damage.

10. Accrued but untaken holiday entitlement

Usually in settlement agreement, annual leave which has accrued in the holiday year but not taken by the termination date, will be paid as a lump sum.

11. Reference

It is common in settlement agreements that a standard form reference is provided for, which will be provided to prospective employers when requested.

12. Departure statement

Sometimes there will be an agreed announcement in the settlement agreement about the employee’s departure which will be annexed or scheduled to the settlement agreement.

13. Restrictive covenants

In employment contracts, this type of clause will restrict an employee of certain activities after their employment has ended. In the context of settlement agreements, the clause can either refer to already existing clauses in the contract of employment, or it may provide for new restrictions.

14. Reaffirmation

Where there is a long gap between signing the agreement and the termination, the employer may ask that a reaffirmation is signed, this is to again waive any claims that may have arisen between the date that the agreement is signed and the Termination Date.

15. Gagging clause

Refers to a section of the employment contract which can also be reflected in the settlement agreement that restricts an employee from disclosing any confidential information about the business, such as trade secrets, assets, company operations or proprietary information. This may be reinforced in a settlement agreement and will also go further to say that the terms of the settlement agreement must also remain confidential.

All of the above terms will be explained in detail using clear, none-legalistic language when we go through the terms of the agreement with you. We will ensure that you understand each of the clauses of the agreement, so that you can make an informed decision as to whether to sign the agreement.

Reasons for employment termination

There are five potentially fair reasons for employment termination by way of dismissal by an employer, which include:

1. Capability (or qualifications);
2. Conduct;
3. Redundancy;
4. Breach of a statutory duty and/or
5. Some other substantial reason (SOSR)

The reason for the dismissal may fall into more than one of those categories, as there can be an overlap between them.

What happens if you don’t sign a settlement agreement?

The purpose of a settlement agreement is to reach an agreeable conclusion to terminate the employment that is beneficial and agreeable to both parties, however, in some instances, either side may refuse to sign.

This may be due to how the settlement agreement has been formed, outlining less than satisfactory arrangements between both parties.

If you are unhappy with the terms of the settlement agreement, then you are not obligated to sign and can refuse to proceed with the agreement, and your employment will not terminate, you will remain an employee unless the employer decides to dismiss you.

In instances where a settlement agreement is not signed, it is worth noting that in some circumstances, the employer may be able to still fairly terminate the employee's employment regardless of the settlement agreement being signed or not.

Furthermore, while employers do generally cover the costs for the legal advice on behalf of the employees, if the employee rejects the agreement, then they may become liable for these legal fees.

Our approach

The specific objectives of settlement agreement negotiations may vary from person to person. For example, you may want to secure higher settlement payments or want to be released from post-termination restrictions (restrictive covenants). Drawing on our extensive experience, we work with you to establish your ideal outcome and advise on the appropriate strategy for achieving it. 

More often than not, we will raise points for negotiation that have never been considered by our clients. Having acted for employees with regards to thousands of settlement agreements over the years, we can deliver a better deal in the vast majority of cases.

As expert providers of employment legal advice, we can provide settlement agreement solicitors for individuals and employment solicitors for employers.

To find out how our expert team of solicitors can help you, contact us today on 08000 32 32 02 or send us an email via sa@smithpartnership.co.uk.