The importance of legal advice on settlement agreements

Settlement agreements are crucial tools for resolving employment disputes, but they come with specific legal requirements to ensure their validity. One of the most critical requirements under the law of England and Wales is that the employee must receive independent legal advice on the terms and effect of the agreement.  

This article explores the risks and consequences for employers who fail to ensure their employees obtain such advice and the benefit to both employers and employees in reaching agreed exit terms using valid agreements with input from legal professionals. 

Legal framework 

Under Section 203(3) of the Employment Rights Act 1996, for a settlement agreement to be legally binding, the employee must have received legal advice from a ‘relevant independent adviser’. This adviser must be a qualified lawyer, a certified trade union official, or a certified advice centre worker.  

The advice must cover the terms and effect of the agreement, particularly its impact on the employee’s ability to pursue claims before an employment tribunal. 

Employees will usually be advised as to the terms of the offer and the option to accept, reject or negotiate the offer, and may also be advised on whether the offer is ‘reasonable’ taking into account likely employment tribunal awards, where relevant.  

The draft agreement will generally include a provision for the employer to pay the costs of obtaining the necessary legal advice up to a certain (fixed) amount but note, this is usually limited to the costs of advising on the terms and effect of the agreement only. It will not necessarily extend to cover the costs of advising whether the offer is a good deal for the employee to accept, or the likelihood of succeeding in any claim against the employer.  

Risks of non-compliance 

If an employee does not receive the required legal advice, the settlement agreement is not legally binding. This means that the employee retains the right to bring claims against the employer, rendering the agreement ineffective. 

Employees can challenge the validity of the agreement by pursuing claims in an employment tribunal. The tribunal will examine whether the statutory requirements, including the provision of legal advice, were met. If not, the agreement will be declared invalid and the claims allowed to proceed. 

Employers may therefore face significant financial liabilities if the agreement is invalidated.  

The risk to employees of not obtaining advice as to the terms of a settlement agreement or settlement offer is that they have not had the benefit of timely advice as to their ability to bring a claim and (where applicable) the reasonableness of the overall package. This is especially important when there are complexities around share schemes, tax consequences and particular incentives or benefits which may not have been considered. In addition, there may be non-financial elements which can be negotiated, including reference wording and announcements. 

Best practice 

Always ensure that employees receive or obtain independent legal advice on settlement offers and agreements. This not only complies with the statutory requirements but also protects the employer from costly future claims. 

Failure to do so can result in invalid agreements, tribunal challenges, and significant financial and reputational risks.  

For more information about settlement agreements, see our previous article.