Settlement Agreements: Common terms

Askews Legal LLP are your local Solicitors based in Coventry, we practice all areas of law but today we are discussing Employment Law and Settlement Agreements today.

What is a Settlement Agreement?


A settlement agreement is a binding contract between an employer and employee. In return for consideration (usually financial), the employee agrees to sign away their right to bring any claims against their employer in an employment tribunal or court, arising out of their employment or the termination of their employment.


There are specific rules governing settlement agreements which must be complied with if the agreement is to be enforceable, for example, the agreement must refer to the specific claims the employee is waiving and it is a requirement that you obtain independent legal advice on the terms and effect of the agreement.


Common terms of a Settlement Agreement


A settlement agreement will always set out the agreed terms relating to your exit from the business, such as the date your employment ends, any arrangements in relation to payment of your salary, notice pay, holiday and expenses, as well as any compensation that is being paid to you. However, it is usual for the agreement to address a number of other matters.


Tax indemnity. Virtually all settlement agreements will contain a tax indemnity clause which will usually require you to indemnify your employer in respect of any tax or employee’s NI contributions due on any monies paid to you, in the event HMRC issues a demand. Such indemnity will usually also extend to covering any interest, penalties, fines or expenses incurred in connection with the demand.


Return of company property. The agreement will usually set out the arrangements for the return of Company property, such as laptop PCs, mobile phones or an ID badge.


Confidentiality of agreement and non-derogatory remarks. The agreement will usually place an obligation on you to keep the existence and terms of the agreement confidential, as well as the circumstances leading up to its negotiation and require you not to make any derogatory or disparaging remarks about your employer or any individual within the business.


Confidentiality and post termination restrictions. If your role is such that you have had access to the Company’s confidential information, the agreement will usually seek to remind you of your confidentiality obligations as set out in your contract of employment. If you have post termination restrictions in your employment contract, for example preventing you from working for a competitor after you leave, soliciting the Company’s customers or poaching their key employees, it is usual for them to be restated in the agreement to remind you of your obligations after you leave.


Reference and announcements: The agreement may attach a schedule containing a draft reference that would be provided upon request to a prospective employer. It may also contain draft wording regarding an announcement about your departure, either internally, or to customers and suppliers.


Why it’s so important to get the right advice


They may look fairly straightforward on the surface, but settlement agreements can often be complex for both the employer and employee. They are prepared by the Company (or their lawyers), with the Company’s interests in mind and there are a number of ‘danger areas’ to look out for, therefore, it is important that you get advice from a specialist employment Solicitor.


If you would like advice on any aspect of a settlement agreement, please call one of our Solicitors in Coventry and specialist employment team at Askews Legal on 024 7623 1000.