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Settlement Agreements

In July 2013 Compromise Agreements in the UK became known as Settlement Agreements. Employers often offer such an agreement when terminating someone’s employment.  By doing so the employer has the reassurance of knowing that it will not face an employment claim in the future.  It is, in effect, a kind of insurance policy.  The employer can draw a clean line under the employment without having to provide a reserve in its accounts to meet the cost of potential claims.


The typical basis of a Settlement Agreement is that the employer offers its employee a financial or other incentive, beyond the employee’s probable legal entitlement, to give up his or her right to bring an employment claim. These claims are typically:


•  for breach of contract e.g. because insufficient notice will be provided;

•  for unfair dismissal;

•  for a redundancy payment;

•  for unlawful discrimination;


...but there are many others too.


If handled properly, a settlement agreement can be used to facilitate an amicable parting of the ways, allowing the employee to transition to new employment elsewhere without feelings of ill will towards his former employer. 


Why does the employee need to take independent legal advice? 


Any agreement between an employer and employee to surrender the employee’s legal rights is unenforceable.  The reason for this is that the law is concerned about the inequality of the bargaining positions of employees and employers.  The law attempts to protect vulnerable people - the low-paid, the young, the inexperienced and the naïve, but of course the law applies to everyone and that includes senior board directors with six-figure salaries. 


Before any such agreement can become enforceable, therefore, the employee must receive independent legal advice from a qualified adviser who also has to provide a certificate to that effect.  The employee receives the benefit of the solicitor’s own insurance policy in case he has received incorrect or inadequate advice.   In this way, the employer’s risk is transferred to the adviser and because the employer stands to benefit from such an arrangement it is usual for the employer to contribute to the adviser’s fee.  Usually the contribution will extend to all of the legal costs incurred by the employee.


Our specialist employment solicitors have a vast wealth of experience of dealing with such matters, at all levels.  We have even advised entire boards of directors during high profile management buy-outs.  We take a sensible, pragmatic and sympathetic approach.  The termination of an employment contract is not just about dry legal principles; it is far more often about people who may be hurt and upset about being asked to leave their employment. 


Although it is not the job of the legal adviser to negotiate the “deal” offered by an employer, we can advise you about whether it would be in your interests to accept such an agreement rather than pursue remedies through the employment tribunals or courts.  We can also help to ensure that any payments received are dealt with in the most tax effective and tax compliant manner. 



For more information please contact:
Bells Solicitors Limited.   Registered in England and Wales no. 07827988.   Authorised and regulated by the Solicitors Regulation Authority.   SRA number 569030.   VAT registration number 137595285