Settlement Agreement Review Andrew Bird

/settlement-agreement-review

1. Flag apparent gaps against the s.203 ERA 1996 conditions for a solicitor to confirm. This skill does not rule on validity. As legal context: if a condition is genuinely missing, the agreement does not contract out of statutory rights and the employee can still claim — so each gap matters and must be confirmed by a qualified adviser.
2. Review the substantive terms against the party's position (employer or employee).
3. Surface tax issues (ITEPA 2003 — termination payments, PENP). Never present computed figures as authoritative — they are prompts for an accountant to sign off.
4. Output a marked-up version with comments or a clean draft.

Settlement agreement (s.203 ERA 1996)

Purpose

A settlement agreement is the standard vehicle for compromising employment claims. It must comply with the conditions in s.203 ERA 1996 [CITE NEEDED — s.203 ERA 1996] (and equivalent provisions in other statutes — EqA 2010 s.144 [CITE NEEDED — s.144 EqA 2010], TULR(C)A 1992 s.288, etc.) to validly settle the statutory claims it purports to cover. Otherwise the employee remains free to bring a claim. This skill flags apparent gaps in those conditions; it does not rule on whether an agreement is valid — that is for a qualified adviser to confirm.

The other valid vehicle is an ACAS COT3 (recorded by the ACAS conciliator) — no s.203 conditions apply. COT3s are simpler; settlement agreements allow more bespoke terms.

s.203 statutory conditions (cumulative — all must be satisfied)

1. In writing.
2. Relates to the particular complaint — generic "all claims" wording without identifying the claims is not enough. List each statutory cause of action by name and section.
3. Independent adviser — the employee must have received advice from a "relevant independent adviser" (qualified lawyer, certified trade union official, certified advice centre worker, or other prescribed adviser).
4. Adviser identified — name and address in the agreement.
5. Adviser insured — a contract of insurance or indemnity provided by a professional body covering the adviser against the risk of loss arising from the advice.
6. Statement that the conditions are satisfied — express recital.

As legal context: a genuinely missing condition is fatal — the agreement may still settle contract claims (which don't need s.203 compliance) but won't bar statutory ET claims. Do not treat your read of the conditions as a ruling. Flag any condition that looks missing or doubtful for a solicitor to confirm rather than declaring the agreement invalid.

Substantive terms — checklist

Payment

• Sum — total compensation payment.
• Breakdown by head (every figure below is [NOT TAX ADVICE — recompute, accountant sign-off]):
  • Statutory redundancy (s.135 ERA [CITE NEEDED — s.135 ERA] — tax-free up to £30k [SME VERIFY — current £30k threshold], doesn't count to PENP).
  • Notice / PILON — taxable as earnings (s.402B ITEPA [CITE NEEDED — s.402B ITEPA 2003] — PENP regime).
  • Ex-gratia compensation for loss of office — first £30k tax-free under s.401-403 ITEPA [CITE NEEDED — s.401-403 ITEPA 2003] [SME VERIFY — current £30k threshold], balance taxable as employment income.
  • Restrictive covenant payment — taxable as earnings (s.225 ITEPA [CITE NEEDED — s.225 ITEPA 2003] — restrictive undertakings).
  • Injury to feelings (discrimination cases) — typically tax-free if causally linked to the discrimination rather than termination (Moorthy litigation [CITE NEEDED — Moorthy v HMRC]; HMRC position contested — [SME VERIFY — current HMRC view]).
  • Pension contribution.
  • Legal fees contribution ([SME VERIFY — typical £500-£750 plus VAT], paid direct to the adviser).
• Tax indemnity — employee indemnifies employer against any further income tax / NICs claimed by HMRC on the termination payment. Standard for employer; employee should resist a broad indemnity that catches tax the employer should have deducted.
• Payment date — typically within 14-28 days of the termination date / signature.

Confidentiality and non-disparagement

• Mutual non-disparagement preferred from employee's side.
• Confidentiality — usually two-way; carve-outs for spouse/partner, professional advisers, regulators (whistleblowing — must not gag protected disclosures, see s.43J ERA [CITE NEEDED — s.43J ERA 1996]), HMRC, and court orders. Recent law has tightened on NDAs in discrimination/harassment cases — [CITE NEEDED — Victims and Prisoners Act 2024] [SME VERIFY — Victims and Prisoners Act 2024 NDA restrictions in regulated professions].

Reference

• Agreed wording attached as a schedule.
• "Factual reference only" is a common employer position. Employee should push for a positive agreed reference.
• Obligation on employer to give substantially the same reference to any future enquirer for [X years / indefinitely].

Warranties and reps

• Employee typically warrants no other unresolved complaints and no knowledge of any matter that would give rise to a complaint.
• Employee returns property, deletes data.
• Employee waives reinstatement / re-engagement.

Restrictive covenants

• Either confirm existing covenants remain in force (employer position), or release them (employee position).
• Garden leave already served counts against post-termination restraint enforceability.

Claims covered

• List each statutory claim by name. Generic "all claims" tail is acceptable as a backstop but does not save a missing specific complaint.
• Carve-outs (standard): accrued pension rights, personal injury (latent / unknown), enforcement of the agreement itself.

Governing law / jurisdiction

• Laws of England and Wales. Exclusive jurisdiction of E&W courts (with ET retained jurisdiction over the underlying employment claims pending settlement).

Workflow

Step 1 — Apparent statutory status (flag, do not rule)

Run through the s.203 checklist. Flag any condition that appears missing or doubtful for a solicitor to confirm. Do not declare the agreement valid or invalid — report apparent status only.

Step 2 — Substantive review

Walk through each substantive term against the checklist. Flag terms that are unusual, missing, or commercially adverse to the user's side.

Step 3 — Tax review

Review the breakdown. If PILON is being paid, work the PENP formula as a cross-check only — [NOT TAX ADVICE — recompute, accountant sign-off] on the result and on every figure. PENP formula: (BP × D) / P — where BP = basic pay in pay period before notice, D = days in unworked notice, P = days in pay period [SME VERIFY — s.402D ITEPA formula and definitions]. Do not present the computed PENP or any net figure as authoritative; it is a prompt for an accountant.

Step 4 — Mark up

Output either: (a) commented review with risk flags, or (b) clean draft.

Output (review mode)

Render the sections below as the finished review — do not echo this template back, and do not invent terms to fill a section; if the agreement is silent on a head, say so. Lead with the not-legal-advice line.

A reviewer-note line: not legal advice; flags apparent issues only; verify with a solicitor before relying on anything below; this skill does not rule on the validity of the agreement.

Apparent s.203 status (s.203 ERA / s.144 EqA) — a table of the six conditions, each marked Present / Apparently missing / Unclear, with a note. Then one line: Apparent status (verify with a solicitor): [conditions appear satisfied / [N] condition(s) appear missing — confirm with a solicitor]. Never state "Valid" or "Invalid".

The conditions to check:

• In writing
• Specific complaints identified (note any that appear missing)
• Independent adviser
• Adviser named and addressed
• Adviser insured (recital)
• s.203 conditions satisfied (recital)

Substantive review — a table by clause (payment breakdown, confidentiality, reference, warranties, restrictive covenants, claims schedule, tax indemnity): position, risk to the user's side, suggested change.

Tax analysis — every figure carries [NOT TAX ADVICE — recompute, accountant sign-off]. Cover PILON / PENP, s.401-403 ITEPA treatment, other heads, and any net-to-employee estimate — all as prompts for an accountant, never as authoritative figures.

Recommended changes — numbered list of specific edits in priority order.

Markers used inline as you go:

• [CONDITION GAP — flag for solicitor to confirm] — a s.203 condition that appears missing or doubtful (not a ruling that the agreement is invalid).
• [NOT TAX ADVICE — recompute, accountant sign-off] — on every tax figure.
• [CITE NEEDED — authority] — a statute or case referenced without a verified citation.
• [SME VERIFY — item] — a threshold, market figure, or contested position counsel should confirm (e.g. HMRC view on injury-to-feelings tax; Victims and Prisoners Act 2024 NDA restrictions; PENP figures).

What this skill does not do

• Provide legal advice. It flags apparent issues for a qualified adviser to confirm.
• Rule on the validity of the agreement. It reports apparent s.203 status only — a solicitor confirms validity.
• Provide the independent advice the employee needs — that must come from a qualified adviser per s.203(3A) ERA 1996 [CITE NEEDED — s.203(3A) ERA 1996].
• Compute tax authoritatively. Every figure needs accountant / tax counsel sign-off.
• Verify case law or statute against a live source — check any authority it cites before relying on it.
• Cover Scotland / NI (different statutory framing).