Settlement Agreements

A settlement agreement, formerly known as a compromise agreement, serves as a legal contract between you and your employer outlining the terms and conditions for ending your employment relationship. By signing this agreement, you agree to forgo your right to bring any claims against your employer in exchange for a monetary settlement.

Typically, an employer will offer a settlement agreement to an employee however it is not unheard of for employees to request them from an employer.

Settlement agreements can be used in the following situations:

• A dispute has arisen which could lead to an Employment Tribunal claim, for example unfair dismissal, breach of contract or discrimination. In this case, an employer may choose to offer a settlement agreement as opposed to following a more formal procedure.
• As an alternative to redundancy, whether voluntary or compulsory, or change of position due to restructuring.
• Due to the poor performance of an employee and neither party wishes to follow a formal route, therefore acting as an alternative to undergoing a disciplinary or capability process.

By signing a settlement agreement, both you and your employer agree to settle any potential claims against each other, providing a clear, swift and agreed-upon resolution.

In signing a settlement agreement you will essentially be waiving your rights to bring an Employment Tribunal claim against your employer.

This can be an important consideration if the reason the settlement agreement has been offered is due to an ongoing grievance or dispute with your employer.  You will need to discuss with your chosen legal advisor whether the settlement agreement would be more beneficial either financially and non-financially, or whether it could be better to pursue a Tribunal claim.

Seeking independent legal advice is a crucial part of reviewing your settlement agreement as, without this step, your agreement will not be legally binding. Here is an overview of the process involved in seeking advice for signing a settlement agreement:

1. Contact a solicitor: The first step is to reach out to an Employment Law Solicitor who can provide you with the necessary legal advice and guidance throughout.
2. Initial information and documents: During your initial meeting, you will need to provide copies of both the settlement agreement and your contract of employment. It is during this meeting that we will discuss with you the circumstances that led to the offer of a settlement agreement.
3. Full review: We will carefully review the documents and consider the circumstances previously discussed. We will inform you of the suitability of the offer and identify any amendments that may be required, explaining our reasoning and ensuring you are comfortable with our suggestions.
4. Negotiation: If amendments are necessary, and you agree to them, the amended agreement can then be presented to your employer for consideration.
5. Explanation of the terms: Once an amended agreement is received and accepted, we will explain the terms and effects of the agreement to you in detail. This ensures that you fully understand the implications of signing the agreement and can make an informed decision.

Obtaining legal advice for a settlement agreement is a necessary requirement for it to be legally binding and effective. In most cases, employers will contribute to your legal fees and provide an initial budget, typically ranging from £300 to £500 plus VAT. Judicial guidance from the Court suggests that £500 plus VAT is likely to be a reasonable fee for advice on such agreements.

If you and your employer agree on the proposed settlement amount without the need for extensive negotiation, it is likely the fee contribution will be sufficient.  However, if further negotiation is required, whether regarding the proposed amount or specific clauses within the agreement, additional legal fees may be incurred.

We will provide you with an estimate of the expected costs and can, as appropriate, engage in discussions with your employer to seek an increased contribution toward these fees. If your employer refuses to increase their contribution, any additional costs will need to be covered by you. Any additional charges that could be incurred will not be actioned without your agreement.  We aim to provide transparent and fair pricing, ensuring that you receive quality legal advice while minimising any financial burden on your part.

Settlement agreements can be concluded swiftly, depending on the circumstances. If you are satisfied with the content of the agreement and the proposed settlement amount, we can generally complete the necessary work within a matter of days. Under employment regulations, specifically the ACAS Code of Practice, it is recommended that your employer gives you a minimum of 10 days to consider the agreement, however this is not mandatory and you can make decisions in a shorter period of time if you are comfortable doing so.

The speed of the process also depends on how promptly your employer responds during any negotiation phase.

If you find yourself under pressure from your employer to expedite the process or if you have a specific deadline that you need to meet, please do discuss that with us.

Our priority is to ensure that the settlement agreement is concluded efficiently, while also ensuring your best interests are protected.

During the review of your settlement agreement, we will guide you through each section, ensuring that you have a clear understanding of its contents. Some of the key clauses that we will draw your attention to include, but are not limited to:

• Termination Date: This specifies the date on which your employment will end if you sign the agreement.
• Waiver: This clause addresses the potential employment tribunal claims that you are waiving by entering into the settlement agreement.
• Payment: This outlines the monetary amount that you will receive in exchange for signing the agreement. This may also include a reference to additional benefits such as your pension, holiday and bonus arrangements.
• Tax Indemnity: This clause pertains to your promise to reimburse the employer for any additional tax that may be due on the sums received.
• Restrictive Covenants: These clauses, which may already be included in your employment contract, aim to restrict your ability to work for or contact certain individuals or companies that could be seen as competition to your employer. These may also be included in your settlement agreement and we can provide advice as to whether they are reasonable and therefore could be enforceable in the future.
• Derogatory Comments: This clause prohibits you from making derogatory comments about your employer.
• Confidentiality: This clause ensures that you will keep the terms of the agreement, including the payment amount, confidential.
• Reference and announcement: While you do not have an automatic right to receive a reference, this clause can be included in the settlement agreement and can be particularly valuable if you have the opportunity to draft the reference yourself. You may also be able to agree how your departure from the business will be communicated to your colleagues, clients and other third parties.
• Return of Company Property: This clause stipulates that you agree to return all company property on or before the termination date.

By signing a settlement agreement, you will be forfeiting certain rights. To ensure that you are not put at an unfair advantage when it is likely your employer will have received legal guidance in the drafting of the agreement, in order for a settlement agreement to be binding, the following requirements apply:

• The settlement agreement must be in writing.
• The agreement must relate to the specific claims that will no longer be able to be brought upon signing.
• You must receive independent legal advice, with the chosen advisor being covered by indemnity insurance and referred to in the agreement.
• The settlement agreement is not legally binding until you and your employer have both signed the document and the Employment Law Solicitor has completed their certificate.

This will depend on the circumstances surrounding the offer of the settlement agreement.  Several factors that will be considered by your employer will include:

• The length of time you have been employed.
• The reasons why the agreement is being offered.
• The potential financial, reputational and resource impact on the business if you were to pursue an Employment Tribunal claim against them.

This can be a complicated area and we will discuss with you in detail the payments involved and any tax implications.  Any payment you receive will be split into two areas:

1. Contractual settlement – anything paid to you under your contractual terms will be treated as a normal payment and be subject to the usual tax and National Insurance.
2. Compensatory payments – this would refer to any payments made as compensation for you entering into the settlement agreement – as a rule, the first £30,000 of this termination payment is paid to you tax-free, as long as your employer is making the payment to you on what is known as an “ex gratia basis”. This means that your employer has decided to make this payment opposed to it being a legal obligation.

Signing a settlement agreement is entirely voluntary, and you have the right to decline the proposed terms.  We can help you understand the potential consequences of rejecting the agreement, assessing the risks, discussing alternative options, and guiding you towards the most appropriate course of action.

If you do not wish to sign the initial agreement offered, you can negotiate on the terms.  We can help you evaluate the terms, identify areas of negotiation, and engage in constructive discussions with your employer to secure a better outcome.

It is important to recognise that negotiating a settlement agreement carries some inherent risks, as the agreement is not finalised until both parties sign it and the solicitors’ certificate is completed. Requesting to negotiate could lead to your employer withdrawing the offer entirely or they may not be open to negotiate to the extent you were hoping.  Before putting forward a counter proposal to your employer, we will help you review the risks and benefits of either seeking to negotiate, accepting the offer or whether you may achieve a more favourable outcome through an Employment Tribunal claim.

Once you have signed a settlement agreement, you generally waive your rights to bring any further claims related to the specified issues. However, you should review the agreement carefully to ensure it covers all potential claims and is fair in its provisions. We will meticulously examine the agreement to ensure your interests are protected and that you are not disadvantaged by signing the document.