Why you must take independent legal advice
Your employer is not being difficult, and they are not doing you a favour. They have no choice.
Section 203(1) of the Employment Rights Act 1996 says that any agreement which tries to stop you bringing a claim under the Act is void. Section 203(3) then carves out an exception for settlement agreements, but only where every one of a short list of conditions is met. The agreement must be in writing. It must relate to particular complaints or particular proceedings, not to claims in general. You must have received advice from a relevant independent adviser on the terms and effect of the agreement and its effect on your ability to pursue your rights. That adviser must be covered by insurance. The agreement must identify the adviser by name. And it must state that the conditions regulating settlement agreements are satisfied.
Miss any one of those and the waiver does not bind you — which is why your employer wants it done properly. A relevant independent adviser means a qualified lawyer, a certified trade union official, or a certified advice centre worker. It cannot be someone advising your employer on the same matter.
The practical effect is that a settlement agreement without independent advice is worth nothing to your employer. That is the leverage you have, and it is why the fee contribution exists.
What should be in the agreement
Most settlement agreements follow a similar shape. What varies — and what is worth negotiating — is the detail.
- The termination payment Split between contractual sums you were owed anyway and a compensation element. The split matters enormously for tax, and getting it wrong costs you money.
- Notice pay Whether you work your notice or are paid in lieu of it. Since April 2018 the post-employment notice pay rules mean notice is taxable either way, so labelling it as compensation does not help.
- Accrued holiday Untaken holiday to the termination date. Always taxable, and frequently understated — check the calculation rather than accepting the figure.
- A reference Agree the wording and attach it as a schedule. A promise to give "a reference" without the text agreed is worth very little.
- The announcement What colleagues and clients will be told. Worth agreeing in writing if you work in a small sector where the story will travel.
- Confidentiality Mutual, not one-way, and never drawn so widely that it stops you making a protected disclosure. See below.
- Restrictive covenants Existing non-compete and non-solicitation clauses are often reaffirmed here. Sometimes they can be relaxed as part of the deal.
- The fee contribution A clause under which your employer pays your legal fees for the advice, usually direct to us.
Confidentiality clauses and what an NDA can never do
This is the part of a settlement agreement that most needs a solicitor's eye, and the part most pages skip.
A confidentiality clause — a non-disclosure agreement — is normal and usually reasonable. Employers do not want the terms of a settlement circulating. What is not acceptable is a clause drawn so widely that it stops you doing something the law says you may always do.
A confidentiality clause cannot prevent you from reporting a criminal offence to the police, from making a protected disclosure under the whistleblowing legislation, from co-operating with a regulator, from making a disclosure required by law, from reporting to HMRC, or from speaking to a safeguarding body about a risk to a child or vulnerable adult. It cannot stop you telling your spouse, your medical adviser or your own lawyer. It should not prevent you from saying that you signed a settlement agreement at all.
The Solicitors Regulation Authority has published a warning notice on exactly this. A solicitor who allows an improperly wide NDA through is the one facing a regulatory problem, which is a useful thing to know about the person advising you.
If your draft contains a confidentiality clause with no carve-outs, that is not a small drafting point. It is the first thing we will ask to have changed.
How settlement payments are taxed
This is where the real money is won or lost, and where the arithmetic surprises people.
The headline rule is that up to £30,000 of a genuine compensation payment for loss of employment can be paid free of income tax under section 403 of the Income Tax (Earnings and Pensions) Act 2003. What people miss is how little of a typical package actually qualifies.
Anything you were contractually entitled to is taxable in the ordinary way: salary to the termination date, accrued holiday pay, contractual bonus, and notice pay. Since April 2018 the post-employment notice pay rules mean the notice element is always treated as earnings and taxed, no matter how the agreement describes it — the days of relabelling notice as compensation to shelter it are gone.
What can fall within the tax-free slice is the genuine ex gratia element: compensation for the loss of the job itself, and statutory redundancy pay. Above £30,000 the excess is taxable, and since April 2020 the employer also pays Class 1A National Insurance on it.
Two things follow. First, how the agreement allocates the total between these categories changes what reaches your bank account, which is why the split is worth negotiating rather than accepting. Second, an agreement will usually contain a tax indemnity making you responsible if HMRC later disagrees with the treatment — so the allocation needs to be defensible, not merely favourable.
How long you have to think about it
The ACAS Code of Practice on settlement agreements says you should be given a reasonable period to consider the proposed terms, and that as a general rule a minimum of ten calendar days should be allowed unless the parties agree otherwise.
An employer who hands you a draft on a Friday afternoon and wants it signed by Monday is not following the Code. The Code is not law in itself, but an employment tribunal must take it into account, and pointing at it is usually enough to buy the time you need.
Use the time. The pressure to sign quickly is often the strongest signal that the offer has room in it.
Protected conversations and "without prejudice"
Your employer may have opened the conversation by saying it was "off the record", "without prejudice" or "a protected conversation". Those are three different things and the difference matters.
Without prejudice is a common law rule. It applies where there is an existing dispute between the parties, and it keeps genuine attempts to settle that dispute out of evidence. If there is no dispute yet, the label does not attach simply because someone wrote it at the top of a letter.
A protected conversation is section 111A of the Employment Rights Act 1996. It covers pre-termination negotiations even where there is no existing dispute, but it is narrower than it sounds: it makes the discussion inadmissible only in an ordinary unfair dismissal claim. It does not protect the conversation in a discrimination claim, an automatic unfair dismissal claim, a whistleblowing claim or a breach of contract claim. And the protection falls away entirely where there has been improper behaviour — undue pressure to sign, for instance, or an ultimatum.
So if the conversation involved anything that felt discriminatory, or you were told to sign or be dismissed, what was said may well be usable. Tell us what was said and how, not just what the draft says.
What cannot be settled
A settlement agreement can waive most employment claims, but not everything.
It cannot waive a personal injury claim for an injury you did not know about when you signed — well-drafted agreements carve this out expressly, and if yours does not, we will ask for it. It cannot affect accrued pension rights. It cannot waive your right to enforce the settlement agreement itself. And it cannot prevent the disclosures described above.
It is also worth knowing what a waiver does cover: it will normally list, by statute and section, every claim you are giving up, and that list will be long. That is not your employer being aggressive — section 203 requires the agreement to relate to particular complaints, so the list has to be specific. Our job is to make sure the list matches the deal you are actually being offered.
What we do, and how quickly
Send us the draft and we will read it the same day.
- Read it and tell you what it means In plain English, clause by clause, including the parts your employer has not drawn attention to.
- Tell you whether it is fair Measured against what you would be likely to recover if you brought a claim instead, and what similar packages look like.
- Check the tax treatment Whether the split between contractual and compensatory sums is right, and whether the indemnity you are being asked to give is reasonable.
- Negotiate if it is worth negotiating On the money, the reference, the announcement, the covenants or the confidentiality wording. We will tell you honestly when it is not worth it.
- Sign the adviser's certificate The certificate your employer needs before the agreement binds anyone.