Who foots the bill for legal costs on a settlement agreement?

If your employer has offered you a settlement agreement, two questions usually follow: why do I need legal advice, and who pays for it? We are asked these questions often, so this article explains how legal advice on a settlement agreement works and how the cost is normally covered.

Why do you need a solicitor for a settlement agreement?

A settlement agreement is a legally binding contract between you and your employer. In return for a payment or other terms, you agree to give up your right to bring the employment claims listed in the agreement, such as unfair dismissal or discrimination claims.

Because you are giving up important rights, the law sets strict conditions. A settlement agreement is only valid if you have received advice on its terms and effect, and in particular its effect on your ability to bring a claim in an employment tribunal, from a relevant independent adviser.

That is usually a solicitor, although certified trade union officials and certified advice centre workers can also give this advice. The adviser must be named in the agreement and must have insurance covering the advice.

Three reasons to take advice before you sign

1. The agreement is not binding without it

The rules exist to stop employees giving up rights they do not fully understand. If the advice requirement is not met, the agreement will not prevent you from bringing a tribunal claim, which is why employers insist on it too.

2. Advice can help you reach a better outcome

Settlement agreements vary widely in their terms and in what is offered. A solicitor can look at your pay, notice period, the reasons your employment is ending and any claims you may have, and tell you whether the offer is reasonable. If it is not, they can negotiate with your employer on your behalf. Our tips for negotiating a severance package explain what to think about.

3. Avoid unnecessary tax

A settlement agreement is often the best way to receive what you are owed, but the way payments are described and structured affects how they are taxed.

Notice pay and holiday pay are taxed in the normal way, while a genuine compensation payment can usually be paid tax-free up to £30,000. Your solicitor will check that the tax treatment is correct. Our article on when a termination payment is fully taxable explains the rules.

Do employers have to pay your legal costs?

There is no legal obligation on an employer to pay for your advice, but in practice employers usually make a contribution, and the agreement will usually say so. A settlement agreement benefits the employer as well, because it protects them from future claims, and it cannot be binding unless you have been advised.

The contribution is normally paid directly to your solicitor. Where it is paid directly to your adviser under the terms of the agreement, and only covers advice about the termination of your employment, it is not treated as taxable income for you.

What does settlement agreement advice cost?

The amount of the employer’s contribution varies, and it may depend on how complex the agreement is. Usually, after an initial call, our solicitors can work within the contribution set out in your settlement agreement, so you do not have to pay any further fees.

You can find out more about the process in our guide to settlement agreements and on our page about settlement agreement advice for employees. If you are not sure whether you need advice at all, our article on whether you need advice before signing a settlement agreement may help.

If you have been offered a settlement agreement, book a free 30-minute consultation with our employment solicitors or call 0141 471 9166.