Why so many people search for a settlement agreement template
If you are facing a dispute with your employer, it is understandable to be feeling stressed and to be worried about money, especially if you might be losing your job.
A settlement agreement can offer a lifeline, giving you a one-off payment in exchange for agreeing not to bring an employment claim against your employer in relation to the dispute. And if you are concerned about your finances, it might seem like a good idea to use a free settlement agreement template to put together terms you can proactively take to your employer.
However, this is almost always a mistake. As we will cover in depth in this article, a settlement agreement has to be tailored to your individual circumstances or you could be leaving yourself at risk and leaving money on the table. Crucially, a settlement agreement is only legally binding if you have received independent legal advice from a suitable professional before signing, so a template is useless by itself.
Read on to learn all about settlement agreements, including why templates are so risky, the hidden costs they can incur, what a good template should look like and why employees almost never have to cover the cost of their own legal advice.
What a settlement agreement actually is
A settlement agreement is a legally binding contract used to end a dispute between an employer and employee or to head off a possible dispute. By signing an agreement, the employee waives their right to bring an employment tribunal claim in relation to the specific issues set out in the agreement. It must meet statutory conditions to be enforceable, such as the employee receiving independent legal advice before signing.
The legal reason a template on its own is worthless
Under section 203 of the Employment Rights Act 1996, a settlement agreement is only legally binding if the employee has received advice from a “relevant independent adviser” (usually a qualified solicitor) who carries appropriate indemnity insurance.
Your legal representative must sign a certificate affirming that you received independent legal advice. Without this, the agreement is not valid and neither you nor your employer will be bound by its terms.
This means that a settlement agreement template by itself is essentially worthless – you must have independent legal advice before signing and it is likely your adviser will be able to improve on the terms set out in any template.
Five hidden costs of using a settlement agreement template alone
While people might be tempted to use a settlement agreement template to save money, this can actually end up costing you money. Reasons for this include:
- The agreement will not be legally binding without independent advice, so neither side will be bound by the terms and any payment you have received might be taxable.
- You may lose out on the chance to negotiate a better settlement, which is something an experienced employment lawyer will achieve day in, day out.
- You could make mistakes with the tax rules, including around the £30,000 tax free exemption and post-employment notice pay (PENP), meaning you end up paying tax you could have avoided.
- You may miss the possibility for additional grounds to claim, such as in relation to protected characteristics (e.g. discrimination, whistleblowing, personal injury).
- You could end up agreeing to restrictive covenants, confidentiality terms, and reference wording that are less advantageous that a solicitor could secure, with the potential to affect your future employment.
What a good settlement agreement should actually include
A good settlement agreement will be tailored to your situation and carefully worded to avoid any ambiguity. As such, there is no “one size fits all” version of a good settlement agreement.
However, there are certain standard clauses that will likely be included in most settlement agreements, covering issues such as:
- Your termination date (if your employment is ended)
- Any payment you will receive in exchange for signing and how this will be treated for tax purposes
- Any additional payments you will receive (e.g. in lieu of notice and unused holiday entitlements)
- A waiver of claims (in which you give up your right to bring an employment claim for specific issues)
- A confidentiality agreement (stating that you will not discuss the terms of the agreement)
- Non-derogatory statements (preventing either party from disparaging the other in future)
- An agreed reference (if applicable)
- Legal fees contribution (specifying exactly what your employer will pay towards your legal costs)
This is not an exhaustive list and one of the key reasons for seeking expert legal advice is to ensure nothing important is missed that could compromise your position.
Who pays for the solicitor (and why the “cost” argument does not stack up)
It is standard practice for your employer to cover the cost of your independent legal advice before signing a settlement agreement. This is because they need you to have this advice or any agreement you sign will not be legally binding.
Your employer will generally agree an amount they are willing to contribute and your solicitor should be able to provide the necessary advice within this budget. If their fees will exceed the employer’s agreed contribution, it is often possible for your lawyer to negotiate a higher contribution from your employer.
As a result, in most cases, you will pay nothing towards the cost of your legal advice. This removes the main reason people tend to reach for a template in the first place – concerns about cost.
When a template can be useful (and when it absolutely cannot)
Where a settlement agreement template can potentially be useful is if you need help to understand the basic structure and common terminology of an agreement. They can also help you to know what to expect before speaking to a solicitor. If you are going to look at a template, make sure you pick one from a reputable source, such as Acas.
That said, while a template can provide useful starting information, it cannot replace independent legal advice. Speaking to an experienced employment lawyer helps to ensure you fully understand the agreement and all its implications, as well as being a statutory requirement for a binding settlement. A template also won’t help you know if an agreement you have been offered is fair or whether a better settlement could be unlocked through the sort of expert negotiation a solicitor can provide.
What to do instead: a smarter, low-risk path
Instead of using a settlement agreement template, the most sensible route is usually to get an offer in writing from your employer (do not sign it yet!), then book a free consultation with an employment solicitor.
Your solicitor will then review the agreement, explain the terms and ensure it offers you a fair deal. If needed, they can negotiate better terms for you. You should only sign the agreement once you are confident you fully understand every clause.
Our settlement agreement solicitors will be happy to provide a free initial consultation and, in almost all cases, we will be able to handle everything for you to a fixed fee that stays within your employer’s agreed contribution.
To arrange a free settlement agreement consultation, please call us on 0800 043 3699, email info@mccannsettlementagreements.co.uk or use the enquiry form on our contact page.
We offer remote consultations and aim to respond within the same day during business hours.
Frequently asked questions
Can I write my own settlement agreement in the UK?
In theory, you can write your own settlement agreement, but this is very risky. The exact wording of the agreement needs to be carefully considered to ensure it does precisely what you need and does not place you at any risk. You would also still need to receive independent legal advice as an employee before signing, or the agreement will not be legally binding. This effectively makes a DIY settlement agreement pointless in most cases.
Is the Acas settlement agreement template legally binding?
The Acas settlement agreement template is intended as a starting point for making a settlement agreement but it is generic and is unlikely to fully cover the circumstances of your specific case. Additionally, you would still need to take independent legal advice before signing or the agreement would not be legally binding.
Do I have to use a solicitor for a settlement agreement?
In practice, almost all employees use a solicitor for a settlement agreement, but technically, you do have other options. The rules set out in the Employment Rights Act 1996 say that employees must be supported by a “relevant independent adviser”. However, this only includes qualified lawyers, certified trade union officials and or advice centre workers with the right accreditation, and they must have suitable indemnity insurance. In most cases, it will be much easier to find a solicitor who meets the criteria than one of the other options.
How much does it cost to get a settlement agreement reviewed?
It generally won’t cost you anything to have a settlement agreement reviewed as an employee. This is because your employer typically contributes to (and usually covers in full) the cost of your legal advice.
What happens if I sign a settlement agreement without legal advice?
Signing a settlement agreement without first receiving independent legal advice is pointless. The terms will not be enforceable, meaning you could still take your employer to an employment tribunal and they will also not be bound by the agreed terms. If any payment has already been made, it may be treated differently (e.g. it may be taxable) and the situation could quickly become very messy. It is, therefore, never advisable to sign a settlement agreement without first receiving proper legal advice.
What should be included in a settlement agreement?
Exactly what should be included in a settlement agreement will depend on the situation, but typical clauses cover your termination date (if applicable), any payments you will receive, tax treatment of those payments, a waiver in which you agree not to bring a claim for specific matters, a confidentiality clause, the terms of any reference you will receive (where appropriate) and how your legal fees will be covered. These examples should not be treated as a checklist as the terms must be tailored to your circumstances and the specific wording is critical.