Terms and Definitions

An in depth look at the definitions and terms used in the Settlement Agreement Process

Due to the introduction of Settlement Agreements in 1993 by the UK Government, there is now a structured process for an individual to negotiate a fair financial settlement at the end of their employment. This benefits both the employers and the employees by drawing up an agreement both sides agree on. The payment makes sure that anything owed to the employee is covered, such as being paid for your notice period or being paid for any outstanding accrued holiday pay. We hope the following guide offers a further explanation of the terms and definitions used when referring to Settlement Agreements. Please don’t hesitate to get in touch to discuss your individual situation as we would be more than happy to help.

The simple mechanism which enabled an employer and employee to part company so that the employee could be paid some money and the employer to have the confidence it would not face a Tribunal claim was to insist that the employee took legal advice so that they understood their rights. What really makes it work is that it is conventional for the employer to pay all or almost all the employees costs of obtaining the advice.

The law is clear, whatever the agreement says, it can only work if the employee obtains legal advice from a suitably qualified and insured person. This is usually a Solicitor because they are readily available to see, always have the correct qualifications and the right indemnity insurance. You can go to other employment law advisers in trades unions and legal advice centres but you will need to check that they are suitably qualified and insured.

Asking anyone, including a Solicitor, how many times they have advised on these agreements is a good idea. We have been advising on these agreements since 1993

The advice on Settlement Agreements should cover 2 broad areas:

  1. A comparison of the money on offer in the Settlement Agreement with what the employee might realistically get at a Tribunal to determine if the amount the employer is willing to pay is enough.
  2. All the other clauses in the Settlement Agreement to see if they are acceptable to you.

The money on offer in a Settlement Agreement varies widely.

There are a large number of factors to be taken into account when assessing possible amounts of compensation in a Tribunal and comparing with the employer’s offer. There is a reason why legal advice is required!!

To give you some initial guidance you should bear in mind the following factors:

There are certain payments an employee is entitled to when being dismissed

  1. Notice pay – the higher of the contractual or statutory minimum (except if the dismissal is for gross misconduct)
  2. Accrued holiday pay
  3. A redundancy payment (if the dismissal is by reason of redundancy). Large firms often have a generous (or not so generous these days) redundancy payment schemes so it should be at least this or the statutory minimum.
  4. The amount to be paid to an employee should include at least these amounts plus a sum of money to avoid the employee bringing a claim.

The Tribunals currently have the power to award compensation up to £89,493 or 12 months gross pay whichever is less and to increase this by up to 25% if the ACAS code on dismissal procedures has not been followed. This is a pretty substantial sum for most employees. However to win it you have to have lose it so if you find a job the day after a dismissal on the same salary and benefits package you won’t have lost very much. Good for you, bad for any sense of injustice you might be feeling.

  1. The Tribunal is unlikely to project a year’s net loss in an economy where they expect people to find other work very quickly. Clearly this will be different in a recession, a pandemic or if there are characteristics about the individual employee e.g family care commitments or disabilities which will make it very difficult for that person to find comparable work.
  2. If you find a job quickly but on a lower salary you can claim the net differential between the two.
  3. Depending upon the actual circumstances in which the employment comes to be terminated, some assessment has to be made of your realistic prospects of winning a case at Tribunal.
  4. In addition, you need to make some assessment of whether you might have been dismissed in any event. i.e the employer may have messed up the redundancy dismissal procedures but if there clearly was a redundancy situation the employer can argue that you would have been dismissed at some point in the near future.
  5. If the dismissal was for some form of misconduct you will have to consider whether or not there might have been any contributory conduct. i.e again the procedure was a mess but your behaviour means that you contributed to the situation.
  6. You need to take into account whether or not the Employer has followed the ACAS code on dismissal procedures. There is an uplift of up to 25% if they have not been followed.
  7. You should also take into account the costs of going to Tribunal, the stress and hassle involved and the fact that you will have to wait around six to twelve months to get your money. This assumes your employer is still in business and able to pay you. By signing a Settlement Agreement you should get a sum of money straight away.


Recitals or Introductory Clauses

If the Agreement contains recitals they should simply record the factual situation which exists. The most important point to note is that they should give a reason for termination. It is quite common to have this by way of redundancy. This enables the employee to present themselves in the best light to a future employer, allows them to claim benefits straight away and allows them to take advantage of any mortgage protection plan. It should make no difference to the employer because the only person who can bring a claim is the employee and if the employee signs a Settlement Agreement they are acknowledging that they will not be bringing any claims in any event.

Termination Clause

First rule of drafting agreements - Always state the bleeding obvious. No point having an agreement about termination of employment unless it mentions this but you might be surprised how many draft agreements miss it out.

This gives a date for termination of employment and should confirm that the employee continues to receive salary and benefits up to the date of termination. The employee is entitled by law to any holiday pay which has accrued due and this should be stated.

Payment Clause

This should set out the payment the employee is to receive and describe it as “by way of compensation of loss of employment” or “by way of compensation for loss of office” or even “a severance payment”. If appropriate, it should refer to the fact that it includes any liability to pay statutory redundancy pay and notice. Sometimes these amounts are broken down separately.

Tax Indemnity Clause

This has now become a standard fixture in Settlement Agreements.

You will appreciate that it is impossible to present a complete picture of what might happen following the application of a tax statute but very roughly the situation is that the Inland Revenue allow the first £30,000 of any non-contractual termination payment to be made free of tax.

The distinction they make is between what is taxable and what is not is broadly what is contractual. It is quite common for notice pay to be included in a termination payment even though it is paid by virtue of contract and should be taxable. Note the distinction in contracts which have provision for simply notice and those which have provision for notice or for payment in lieu of notice.

Confidentiality and Disparaging comments

It is common to have a confidentiality clause in these Agreements. Generally the employer is concerned that the amount of any payment should not be broadcast around the Company, its customers and, in extreme cases, the press.

It is also common to have a clause which states that you cannot slag off the employer its directors and employees. It always seems faintly ridiculous that you should be in breach of an agreement because you have said something unpleasant about your bosses down the pub on a Friday night with your friends. You’ve just been dismissed, what do they expect you to say!! This is however a standard clause in most agreements.

We never recommend being in breach of an agreement but there are some employees who keep quiet until after they have received the money. If they choose to breach this condition after receiving the money it is generally more difficult for the employer to take the money back than withhold it in the first place.

You also need to be very careful with social media. It is very easy for your friends or followers to pass on what you have said and Judges treat comments on social media as though they were published on the front page of a daily paper.

Operative Terms

There will always be a clause which states that you accept the terms of the Agreement in full and final settlement of all your claims. These are statutory claims and they have to be set out in full. Any claim not mentioned is not barred.

There are generally three exceptions made, one in respect of personal injury to cover situations in which you have suffered a personal injury but are not aware of it at the time of dismissal but need to come back at a later date to bring a claim. Hopefully this is a lot less of a problem in modern life but there have been issues in the past e.g. employees working with asbestos. It is also usual to have an exception in respect or accrued pension rights. This is on the basis that if the Company has not paid the right amount into a pension scheme you should have the right to go back and challenge it.

There is usually an exception to allow the employee to enforce the terms of the Agreement i.e. payment of the monies due

It is usual to have a clause which stops you bringing any contractual claims or other rights of action. The previous clause only covers statutory claims e.g unfair dismissal or discrimination.

Employee warranties

These are standard clauses complying with the exact provisions of s.203 of the Employment Act 1996. The Settlement Agreement is only effective if you are able to confirm that you have received the appropriate legal advice from a suitably qualified person.

You have to be advised that there is an appropriate policy of insurance in force covering the risk of a claim by you in respect of any negligent advice.

It is usual for you to confirm that all the claims previously listed are all the claims which you might have against the Company and that you have made the legal advisor aware of this.

There is a standard sub-paragraph whereby both parties acknowledge that the conditions regulating Settlement Agreements contained in the Employment Rights Act 1996 apply to this Agreement and are satisfied by it.

Legal Costs

It is usual for the Company to agree to pay a sum of money in respect of legal costs. The reason behind this is that it is the Company that is getting the benefit of the Settlement Agreement, i.e. the fact that you will not bring any claims.

A low amount for a Settlement Agreement would be £300 plus VAT. A high amount would be £1000 plus VAT. They are usually pitched at around £350- £500 plus VAT. With regard to relatively simple Settlement Agreement’s which do not need a lot of negotiation the figure is usually sufficient to pay the costs. If negotiations become protracted we can almost always negotiate a higher fee or increase the amount on offer so much that the increase in costs is small by comparison.

Return of property

It is usual to have a clause whereby the employee agrees, usually on the termination date, that they will return all documents, property etc which belong to the Company. This is simply a statement of the general legal position.


Not every Settlement Agreement contains a clause concerning a reference. If it does so it is ideal from your point of view if that reference is set out as an appendix to the Agreement so that you know what is going to be said about you.

Otherwise, an agreement to give a reference should be an agreement to give a fair and accurate reference. It should also contain a sentence that any oral or other communications about you will be consistent with the terms of the reference.

Certificate of legal adviser

The end of the agreement will always be a standard certificate for the Legal Adviser to sign. It is usual for the Adviser to recreate the form of words on headed notepaper and to return that with the Agreement to the Company.

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