Tue 04 Sep 2018

Settlement agreements

Employers and employees may resolve their employment disputes by signing a document known as a settlement agreement (also sometimes referred to as a severance agreement or termination agreement). In addition, an employee may be asked to sign a settlement agreement if they are receiving an ex-gratia payment such as an enhanced redundancy payment.  

The offer from the employer to the employee will usually be described as ‘without prejudice’ so as to prevent the terms of the offer being referred to in the event that the employee chooses not to accept the agreement.

A settlement agreement, is binding once it is signed and prevents a claim being raised by the employee against their former employer.


In terms of the Employment Rights Act 1996 employees are not permitted to contract out of their statutory employment rights except in cases where the following conditions have been met by the settlement agreement:-

1. The Agreement must be in writing.

2. The Agreement must relate to the particular complaint meaning that it must narrate the specific claims being waived.

3. The employee must have received independent legal advice from an independent legal adviser as to the terms and effect of the proposed Agreement.

4. The adviser must be identified in the Agreement.

5. The Agreement must state that all of the above conditions have been satisfied. 

Once these conditions have been met and the agreement is signed by the parties, it will have the effect of discharging the employee’s statutory rights referred to in the agreement. Proceedings which may be settled include unfair dismissal claims, discrimination claims, claims for breach of contract, unlawful deduction of wages and equal pay claims. The employee in return for signing away their rights will usually receive compensation normally within a specified period of between 7 to 21 days.

Although a settlement agreement normally requires the employee to waive all of their employment related rights against the employer, there are usually two exceptions to this general principle. It is common for settlement agreements to exclude a waiver of personal injury and/or accrued pension rights claims which enable the employee to be able to make such a claim despite signing the agreement.

Settlement agreements will cover some or all of the following points:-

• Payment of a lump sum

• Contribution towards legal fees

• Provision of an agreed reference

• Provision of outplacement counselling (i.e. assistance in finding alternative employment)

• Confidentiality/Protection of reputation

• Return of company property

• Treatment of outstanding company expenses

• Restrictive covenants 


The first £30,000 of an ex-gratia payment compensating the employee for loss of employment will usually be tax free. However, any contractual payments or any payments relating to any notice period (whether worked or not) should be taxed in the usual way, including payments in lieu of notice.  

Legal fees

There is no set rule as to who should pay for the legal advice the employee receives. However, it is common practice for the employer to contribute towards the employee's legal fees. It is up to the employer how much they contribute. 

Breach of agreement

If either party breaches the terms of the settlement agreement, they will have the same remedies available to them as they would have for any breach of contract and will be able to sue for damages if they suffer loss as a result of the other party’s breach. Depending on the circumstances, if the employee breaches the agreement, they may require to repay any money they have been paid in terms of the agreement. 


It is important that employers take legal advice prior to issuing a settlement agreement to ensure that it is suitably tailored to the actual circumstances and identifies all the potential claims the particular circumstances could give rise to. For a settlement agreement to be valid, employees must take advice. Morton Fraser has a team of employment lawyers based in Edinburgh and Glasgow who frequently deal with settlement agreements. Although we are based in Edinburgh and Glasgow our employment lawyers can advise on settlement agreements irrespective of where you live in Scotland. We can meet face to face or via a video call. If you would like more information, please contact the following employment lawyers:-



Innes.clark@mfmac.com or call 0131 247 1181


lindsey.cartwright@mfmac.com or call 0141 274 1141 



You can also find Innes on Google+ and X or connect with him on LinkedIn


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