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The Mandate for Independent Legal Advice
To be legally binding, an employee must receive independent legal advice on the terms and practical effects of the agreement, specifically, how it restricts their ability to pursue claims before an employment tribunal.
This statutory requirement protects employees from undue pressure. Furthermore, the independent legal adviser must hold a valid professional indemnity insurance policy covering the risk of a claim by the employee.
Key Legal Requirements
Beyond independent advice, a settlement agreement must satisfy the following statutory criteria:
- In Writing: The agreement must be a fully executed written document.
- Specific Complaints: It must clearly state the particular complaints or proceedings it intends to resolve.
- Statutory Compliance: It must explicitly state that the statutory conditions regulating settlement agreements have been fully satisfied.
Note: The Advisory, Conciliation and Arbitration Service (Acas) publishes a statutory code of practice that outlines these legal frameworks in further detail.
Strategic Negotiation and Valuation
Determining whether a settlement offer is reasonable requires a forensic assessment of potential claims against the employer. When advising clients, we weigh the following critical factors against the initial offer to evaluate if a higher sum can be negotiated:
- The legal merits and prospects of success of any potential claims.
- The financial value of those claims versus the proposed termination payment.
- Anticipated legal costs, noting that parties in an employment tribunal generally bear their own costs.
- The significant time horizon required for a claim to be heard in a tribunal.
Even in the absence of strong legal claims, a enhanced package can often be negotiated based on commercial pragmatism, institutional goodwill, or a mutual desire for an expedited, amicable departure.
Key Terms and Clauses to Consider
1. Tax Efficiencies
Generally, the first £30,000 of a genuine redundancy or termination payment is exempt from income tax and National Insurance Contributions (NICs). However, exceptions apply: crucially, any sum representing Post-Employment Notice Pay (PENP) or contractual earnings is subject to standard tax and NIC deductions.
2. Legal Fees
While there is no statutory obligation for an employer to cover the employee’s legal fees, it is standard commercial practice for them to contribute a fixed sum toward the cost of obtaining the mandatory independent legal advice. If negotiations become protracted and fees exceed this contribution, the shortfall falls to the employee unless an increased indemnity can be negotiated.
3. References and Announcements
An agreed reference template can be formally annexed to the settlement agreement, legally obligating the employer to provide only that wording to future prospective employers. In regulated sectors, such as financial services, it is standard practice to provide only a factual reference (confirming dates of employment and job titles). Where appropriate, we also recommend negotiating an agreed internal or external announcement regarding your departure.
4. Confidentiality and Non-Disclosure
Settlement agreements routinely contain strict confidentiality clauses (often referred to as Non-Disclosure Agreements or NDAs). These typically prohibit the disclosure of the agreement's terms and the circumstances surrounding the departure. Standard carve-outs permit disclosure to immediate family, professional advisers, or as required by law.
Important Protection: A settlement agreement cannot legally prevent an employee from whistleblowing (making a protected public disclosure) or reporting a crime to the police. Clauses attempting to restrict an employee from raising allegations of harassment or discrimination are void under current regulatory guidelines.
5. Non-Derogatory Statements
Employers frequently require a commitment that the departing employee will not make disparaging remarks that could damage the firm's reputation. To ensure equity, we routinely seek reciprocal clauses protecting the employee. Because corporate entities cannot easily police all staff, these are often framed as "reasonable endeavours" or specifically targeted to instruct named executives and managers.
6. Restrictive Covenants
Existing post-termination restrictions, such as non-compete clauses or non-solicitation bans regarding clients and staff, are often reaffirmed in a settlement agreement. As part of the wider negotiation, it is often possible to have the employer waive, shorten, or modify these covenants to protect your future career mobility.
7. Bonuses, Equity, and Deferred Compensation
If you are expecting a bonus or hold unvested equity (shares, stock options, or deferred cash awards), the agreement must explicitly detail how these will be treated. While redundant employees are often designated as "good leavers", meaning awards continue to vest on schedule or are accelerated, this depends heavily on the specific scheme rules and requires careful legal drafting.
Expert Legal Representation
Every employment departure is unique, involving distinct financial, legal, and reputational risks. This guide is for informational purposes only and should not replace tailored legal counsel.
