What is a Settlement Agreement? Let me explain.

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.

The purpose of this blog post is to help employees to understand what a settlement agreement is and what they should do if they receive one.

A settlement agreement is (*cough) an agreement to settle

When you’ve been in the employment law business as long as I have, you can give that kind of advice almost without thinking.

But that’s what it is – an agreement to settle a dispute (or a potential dispute) between an employer and an employee.

They used to be called compromise agreements but it was felt that the word ‘compromise’ was putting people off because it was a sign of weakness.

So, why the long document?

Why can’t an employer and an employee just shake hands on a deal and walk away? Or at least have an exchange of emails setting out the terms on which they’ll end the employment relationship?

In most cases, the employer has more money and more commercial experience than the employee – it’s what employment lawyers call an inequality of bargaining power.

In order 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 sometime run to 3 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 or the settlement agreement 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 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.

How much should you expect to be paid in a settlement agreement?

If you agree a settlement agreement, you give up your right to bring legal action against your employer in an employment tribunal. So, you need to know the value of those rights.

How much should you expect to recover in an employment tribunal? This is a technical question but you may find this article helpful.

Can you negotiate a settlement agreement?

There is no obligation to accept an offer of a settlement agreement and you may want to consider negotiating with your employer.

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.

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.

During this time, you should contact an employment solicitor to get some advice. 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.

From a landline: 0800 531 6050

From a mobile: 0330 333 6050

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