Settlement Agreement

Employment Settlement Agreement: Create a Verified Settlement Agreement

A verified settlement agreement is a legally binding contract between an employer and an employee that ends employment on agreed terms. The employer usually makes a payment and the employee agrees to give up claims they could otherwise bring, for example in an employment court or tribunal. Robot Lawyer drafts your employment settlement agreement from your answers under the law you choose, with the termination date, payments, tax treatment, reference, confidentiality and the signing steps that law requires. On the Verified plan, a legal professional checks it before it is sent.

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What Is an Employment Settlement Agreement?

A settlement agreement lets an employee give up legal claims arising from their employment, such as unfair dismissal or discrimination claims, in exchange for a payment and other agreed terms. Depending on the country, it may also be called a compromise agreement, a separation agreement and release, or a deed of release. It can end the employment or settle a dispute while the employee stays in their job, but this document is designed for ending employment.

Drafts are usually marked so that they can't be used as evidence if talks fail, and nobody is bound until the final version is signed. Your agreement uses the marking that suits the law you choose.

Is a Settlement Agreement Right for You?

A settlement agreement is usually right if:

• Employment is ending by agreement
  For example after a redundancy, a restructure or a breakdown in the working relationship, and both sides want a clean break.
• There is a payment for the loss of the job
  The employer is paying more than the employee is already owed, in return for a waiver of claims.
• There is a risk of a claim
  The employee has raised a grievance or there is a possible claim that both sides want to settle.
• You know which law governs the employment
  Your agreement follows the law of the country or US state you choose in the first question.

It may not be right if:

• Nothing is being paid beyond what is owed
  An employee will not usually waive their rights for nothing. A simple Employment Termination Letter or Redundancy Letter may be enough.
• The employee works across borders
  If the employee works in more than one country, or the employer and employee are in different countries, take tailored advice on which law applies.
• A claim has already started
  The court or tribunal may have its own settlement process.
• Several employees are leaving at once, or a pension or share scheme is involved
  These cases usually need tailored advice.

Making a Settlement Agreement Binding

Each country sets its own conditions for giving up employment claims. Common requirements are:

• It must be in writing
  And it should identify the claims or complaints being settled.
• The employee should take independent legal advice
  Some laws make this compulsory, with a named adviser who signs a certificate. Others require written advice to consult a lawyer.
• The employee must have time to consider it
  Some laws set a minimum review period or a period to revoke after signing.
• Some rights can't be waived
  Such as accrued pension rights or unknown personal injury claims, depending on the law.

If the conditions are not met, the employee may still be able to bring claims after accepting the money. Your agreement includes the formalities that apply under the law you choose.

Tax on Settlement Payments

Not every payment in a settlement agreement is taxed in the same way:

• Compensation for the loss of the job
  Some countries give partial tax relief, up to a limit. Others tax it in full.
• Notice pay is usually taxed
  Pay in lieu of notice is normally treated as earnings, like salary.
• Salary, holiday and bonus are taxed
  Normal pay up to the termination date, accrued holiday pay and bonuses are earnings.
• Legal fees contribution
  Often not taxable when paid directly to the adviser.

Your agreement sets out how each payment is treated under the law you choose and who is responsible for any tax due. Check the tax treatment if the payment is large, includes pension contributions or shares, or the employee lives abroad.

What's Included in Your Settlement Agreement?

• The termination date and notice
  The last day of employment and whether notice is worked, spent on garden leave or paid in lieu.
• Payments and benefits
  Final salary and holiday pay, any notice pay, the termination payment, when it will be paid and any other agreed benefits.
• Tax
  How each payment is treated for tax, and who is responsible for any tax due.
• Waiver of claims
  The employee settles the complaints you list and all other claims, apart from those that can't legally be waived.
• Confidentiality
  The terms and circumstances stay confidential, with the protections the law requires, such as whistleblowing and reporting to the police or regulators.
• Non-derogatory statements
  An optional promise not to criticise each other, one way or both ways.
• Reference
  A factual reference, an agreed reference in a schedule or no reference.
• Return of property
  Laptops, documents and other company property returned by the termination date.
• Legal fees
  The employer's contribution towards the employee's legal advice.
• Warranties
  The employee confirms key facts, such as not having a new job lined up, with a repayment clause if this is untrue.
• Restrictive covenants
  Existing restrictions confirmed, or new restrictions with a separate payment, where you choose them and the law allows them.
• Advice and signing
  The advice, review and signing steps the law you choose requires, including an adviser's certificate where one is needed.

How It Works in Different Countries

Key differences, in brief (always check the current rules):

• United Kingdom
  In England, Wales and Scotland, statutory claims are only waived if the agreement meets the conditions in section 203 of the Employment Rights Act 1996, including advice from a named, insured independent adviser, and ACAS suggests allowing at least 10 calendar days. Northern Ireland has similar rules for compromise agreements. Up to £30,000 of a genuine termination payment is usually free of income tax.
• United States
  Usually called a separation agreement and release. To release age discrimination claims by an employee aged 40 or over, federal law requires written advice to consult a lawyer, at least 21 days to consider it (45 days in a group exit) and 7 days to revoke. Some states limit confidentiality and non-compete terms.
• Ireland
  A waiver is more likely to be upheld if the employee had independent legal advice. Ex gratia termination payments may qualify for partial tax relief.
• Canada
  Minimum employment standards can't be waived, so the payment should exceed them. Rules differ by province.
• Australia
  Settlements are often made by deed of release. Minimum entitlements under the Fair Work Act 2009 can't be contracted out of, and genuine redundancy payments get concessional tax treatment.

How It Works on Robot Lawyer

1. Answer the questions
   Tell us about the employer, the employee, the termination date, the payments and the terms you want.
2. Generate your agreement
   We draft a full settlement agreement under the law you choose, with the marking and formalities that law requires.
3. Get it verified
   On the Verified plan, a qualified legal professional checks the agreement within 24 hours and makes amendments where needed. Our lawyers are qualified in England and Wales, so for another country's law we also recommend a check by a local lawyer. See how our documents are verified.
4. Send it for advice and signature
   The employee takes independent legal advice, any adviser's certificate is signed and both parties sign the agreement.

How Much Does It Cost?

Robot Lawyer is a subscription. Essentials is £13.99 a month and Verified, which includes a check of your finished agreement by a legal professional, is £24.99 a month. Both start with a 7-day free trial. See our pricing.

If the deal is complex, such as a senior executive, shares or share options, pension enhancements, several employees leaving at once or an employee working abroad, take tailored advice as well.

Settlement Agreement FAQs

Which settlement agreement do I need?

Use this Settlement Agreement when employment is ending and the employee gives up claims in return for a payment. If you only need to set out an exit package, use our Severance Agreement. To record terms agreed at mediation in another kind of dispute, use our Mediation Settlement Agreement, and to settle a debt between a debtor and a creditor, use our Debt Settlement Agreement.

Does the employee have to sign a settlement agreement?

No. A settlement agreement is voluntary. An employee can negotiate the terms or refuse to sign. Allow reasonable time to consider it and take advice.

Who pays for the employee's legal advice?

It is usual for the employer to contribute towards the employee's legal fees, often a fixed sum paid directly to the adviser. Your agreement records the amount you choose.

Is a settlement payment tax-free?

Usually only partly, if at all. Notice pay, salary, holiday pay and bonuses are taxed in the normal way. See How It Works in Different Countries.

Can a settlement agreement stop the employee whistleblowing?

No. In most countries, a confidentiality clause can't stop someone reporting wrongdoing to a regulator, reporting a crime to the police or making other legally protected disclosures. Your agreement includes the protections the law you choose requires.

Can an employee still bring a personal injury claim?

Personal injury claims the employee does not know about when they sign, and claims for accrued pension rights, are usually excluded from the waiver. Your agreement lists what is excluded.

Are settlement discussions confidential?

Usually. In most countries, settlement offers can't be used as evidence of liability if talks fail, but the rules vary, so avoid improper pressure.

What is the difference between a settlement agreement and a severance agreement?

A settlement agreement is built around the employee giving up legal claims in exchange for a payment, with the formal steps that make the waiver binding, such as independent advice or a review period. A severance agreement focuses on the exit package, such as severance pay, notice and benefits. The names overlap in some countries. See our Severance Agreement.

Can I use this agreement in any country?

Yes. Choose the governing law in the first question and your agreement is drafted for that country or US state. Our lawyers are qualified in England and Wales, so for another country's law we recommend a check by a local lawyer as well.

Create a Verified Settlement Agreement

End employment cleanly, with the payments, tax and legal protections in writing. Related documents: Severance Agreement, Redundancy Letter, Employment Reference Letter and Non-Disclosure Agreement (NDA).