Understanding Settlement Agreements: A Guide for Employees

For many employees, the first time they hear the term ‘settlement agreement’ is when their employer offers them one. If you’ve never seen one before, it can be quite daunting. If this is your first encounter with such a document, it might seem overwhelming. This guide will help you understand what a settlement agreement is, the implications of accepting one, and how to ensure your interests are protected..

What is a settlement agreement?

A settlement agreement is a legally binding document between an employee and an employer that outlines agreed terms, usually when the employment is coming to an end. Typically, it involves the employee waiving their right to sue the employer, usually in exchange for a financial sum. For instance, if an employer has not treated an employee fairly during the termination process, the employee could potentially claim for unfair dismissal. Signing a settlement agreement, however, would mean giving up such a claim.

That’s why many employers like settlement agreements. It eliminates the risk of being sued.  It can also be attractive to employees as well because it means receiving a significant financial payment without the hassle of an Employment Tribunal claim.

Is a Settlement Agreement the Same as Redundancy?

A settlement agreement is often used in a redundancy context. However, they are not the same.

Redundancy usually means that the business needs to reduce its headcount. One of the ways they can do that is by offering staff a settlement agreement. If the offer of a settlement agreement is refused, the employer must go through a formal redundancy procedure.

Settlement agreements can be used in any employment situation – not necessarily redundancy.

There are several factors to weigh up if you have been offered a settlement agreement as an alternative to redundancy.

Key Elements of a Settlement Agreement

To protect the employee from entering into a bad deal, there are certain minimum requirements for the settlement agreement to be valid.

These include:

• the settlement agreement must be in writing
• it should set out the particular claims that the employee is settling (this list can sometimes run to several pages)
• the employee must get legal advice.

So, it’s not an option for an employee just to accept a deal and walk away. The employee must get legal advice on the settlement agreement. Otherwise, it isn’t legally binding. That’s why the employer will usually pay the employee’s legal costs for obtaining advice on the agreement.

Protected Conversations

Employers and employees are allowed to have ‘protected conversations’ as long as the intention is to explore the possibility of a settlement agreement.

In other words, they can discuss the option of a settlement agreement off the record. The discussions can’t be used in evidence if the dispute ends up in an employment tribunal.

The purpose of this rule is to encourage both parties to discuss matters freely and without fear of recriminations.

If you’re invited to a meeting to discuss the possibility of a settlement agreement, you should find out more about how to have a protected conversation with your employer.

Assessing a Settlement Offer

A good settlement offer reflects the value of your legal rights. You need to consider all of the circumstances, including:

• the reason your employment is ending
• whether you have been treated fairly
• your salary and length of employment
• how long you expect to be out of work

Many factors affect the financial amount you are offered in a settlement agreement, and we recommend you get legal advice at an early stage.

What happens if you refuse a settlement offer?

You are free to decide whether to accept or refuse any settlement offer.

If you refuse it, your employer may make a higher, more acceptable offer.

But what happens if an agreement can’t be reached and you refuse all settlement offers?

You won’t receive all the payments

Usually, a settlement agreement includes an “ex-gratia” payment, also referred to as a termination payment or compensation. This is the sum you receive only if you agree to a settlement agreement. If you don’t agree, you won’t get that amount.

You will still get some payments

If you refuse the settlement offer and your employer terminates your employment anyway, you are still entitled to some payments, such as:

• Notice pay (unless the reason your employment is ending is gross misconduct)
• A statutory redundancy payment (if the reason for ending your employment is a redundancy)
• Payment for any accrued but untaken holiday

You are free to claim compensation from your employer

By choosing not to sign a settlement agreement, you retain your right to pursue an employment tribunal claim against the company. This may be worthwhile if you have good prospects of being awarded more compensation than your employer offers.

Can you negotiate a settlement agreement?

Rather than completely refusing the option of a settlement agreement, you may want to consider negotiating instead. But how much should you ask for?

A good place to start is to think about how long you’re likely to be out of work and what your lost earnings will be as a result. Perhaps ask your employer to pay you enough to tide you over.

However, there needs to be some incentive for your employer to increase the offer. You may want to read a few tips on negotiating a settlement agreement to get you started.

How much should you ask for in a settlement agreement?

There are several factors to consider when assessing the financial amount you should ask your employer to pay. The most important questions are:

• how long have you been employed?
• is your employer treating you fairly?
• how long will it take you to find another job?
• what will your lost earnings be whilst you’re out of work?

You may want to prepare a schedule showing how you have calculated the amount you want in the settlement agreement.

For more information about how those questions affect your financial settlement, read this article about how much money you should get in a settlement agreement.

What should you do if you’ve received an offer of a settlement agreement?

Your employer will probably give you a deadline for responding to the offer. The ACAS Code of Practice on Settlement Agreements recommends 10 days from the date you receive the settlement agreement.

You should contact an employment solicitor to get some advice during this time. It’s a chance to discuss:

• the factors that led up to the settlement agreement being offered
• are you being treated fairly?
• is the amount on offer reasonable?
• the best way to negotiate (if appropriate)
• anything else that your employer could do for you, such as a reference

You will then be well placed to make a decision whether or not to accept the settlement agreement.

Would You Like a Free Consultation About Your Settlement Agreement?

If you have received a settlement agreement, you will need to make sure you receive legal advice on it. We offer a free initial consultation.

Our advice will include:-

• An explanation of how the settlement agreement will affect you;
• Our opinion on the suitability of the offer and whether there is scope for negotiating a higher settlement for you;
• Consideration of the tax implications and whether the payments are being made in the most tax-efficient way.

We advise clients throughout the UK, and there’s no need to make an appointment. Call us now for a free consultation.

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