Who pays for settlement agreement advice? Employer contributions explained

Your employer usually pays for your independent legal advice on a settlement agreement. The agreement normally includes a fixed contribution towards your legal fees, paid directly to your solicitor. Paid that way, the contribution is not taxable. If it does not cover the work, the usual step is to ask your employer to increase it.

This guide explains why employers pay, how much is typical, the tax position and what to check. It applies to employees in England and Wales.

Why your employer pays

A settlement agreement only stops you bringing most statutory employment claims if you have received independent legal advice on it. That requirement comes from section 203 of the Employment Rights Act 1996. Without your advice, the agreement does not give your employer the protection it wants.

So the advice is in your employer's interest as well as yours, and almost every employer offers to pay towards it. The offer is not a legal requirement, but it is standard practice.

How the contribution works

The agreement usually contains a clause along these lines: the employer will pay up to a stated sum towards the employee's legal fees for advice on the terms and effect of the agreement, on receipt of an invoice addressed to the employee and marked payable by the employer.

In practice:

1. You choose and instruct your own solicitor.
2. Your solicitor advises you and signs the adviser's certificate.
3. Your solicitor sends the invoice for the agreed contribution to your employer.
4. Your employer pays your solicitor directly.

The invoice is addressed to you because you are the client, but it is paid by your employer under the agreement.

How much is typical

Contributions vary widely between employers. Larger contributions are often offered for senior employees, agreements with complex share or bonus terms, or where negotiation is expected.

If the contribution does not cover a proper review, it is normal for your adviser to ask your employer to increase it. Many employers agree, because a delay in getting the agreement signed costs them more.

Is the contribution taxable?

Not if three conditions are met. Under section 413A of the Income Tax (Earnings and Pensions) Act 2003:

• the payment is for legal costs incurred only in connection with the termination of your employment;
• the settlement agreement provides that your employer will make the payment; and
• the payment is made directly to your lawyer.

If your employer pays you instead, and you pay your solicitor yourself, the exemption does not apply in the same way. Make sure the agreement says the contribution is paid directly to your adviser.

What if the contribution does not cover the fee?

Ask your solicitor at the start. A good adviser tells you in writing:

• the fee for a standard review;
• whether the contribution covers it in full;
• what you would pay, if anything; and
• what extra work, such as negotiation, would cost.

Usually the answer is to ask your employer to increase the contribution. Employers often agree, because they need you to be advised before the agreement is binding. If your employer will not increase it, you may need to pay the difference, depending on the case.

My own approach: my fee for a standard review is £1,050, and most cases are completed within that budget. If your employer's contribution is lower, I ask your employer to increase it. If it will not, I tell you in writing, before I start, what the difference would be. I am not VAT-registered, so no VAT is added. See the settlement agreement service page and the fees page.

What if you do not sign?

Some agreements say the contribution is payable whether or not the agreement is signed. Others make it payable only once it is signed. If you are advised not to sign, or you decide to negotiate, check the wording and ask your adviser how their fee is handled.

Does an employer-paid solicitor act for the employer?

No. Your solicitor acts only for you. Your employer pays the fee because the agreement says it will, but it is not the client and does not receive your advice. You are free to choose any qualified adviser, even if your employer suggests one.

Next step

If you have been offered a settlement agreement, see how settlement agreement advice works online, or send me your employer's name and your deadline through the enquiry form. If the agreement is part of a redundancy, see what to check before you sign.