A settlement agreement is an important employment document that can significantly impact your rights and financial future. Whether you’re being made redundant, dismissed, or leaving your job amicably, a settlement agreement involves waiving your rights to bring claims against your employer, usually in exchange for financial compensation.
Understanding the terms of this agreement and what you’re entitled to is essential to ensuring you’re making the best decision for your future. This comprehensive guide will walk you through what a settlement agreement entails, how it works, and the key elements you must consider before signing.
What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employee and employer that outlines specific terms, usually when employment is ending. These agreements typically involve the employee waiving their right to bring claims against the employer in exchange for a financial settlement.
Employers often use settlement agreements to avoid the risk of any claims, even if that risk is low. Employees may also find the option of a settlement agreement attractive because it offers a significant financial payment without the need for a lengthy Employment Tribunal process.
Claims a Settlement Agreement Can Cover:
Settlement agreements can cover a wide range of potential claims, including:
- Unfair dismissal
- Discrimination
- Redundancy
- Unpaid wages
Is a Settlement Agreement the Same as Redundancy?
While a settlement agreement may often be used in redundancy situations, they are not identical.
Redundancy occurs when a business needs to reduce its workforce. Sometimes, employers may offer a settlement agreement to employees facing redundancy. If the employee rejects the settlement, the employer must follow a formal redundancy procedure.
It’s important to note that settlement agreements can be used in many different employment situations, not just redundancy.
If you’re unsure whether to accept a settlement offer in a redundancy situation, read this guide on settlement agreements and redundancy.
What are the Key Elements of a Settlement Agreement?
To ensure fairness, settlement agreements must meet specific legal requirements. These include:
- Written Agreement: The agreement must be in writing to be enforceable.
- Listed Claims: The agreement should detail the specific claims being settled. This list can sometimes span several pages.
- Legal Advice: The employee must receive independent legal advice on the agreement for it to be valid.
As an employee, you cannot simply accept a settlement without legal advice. This is why most employers offer to cover the legal costs of obtaining this advice. For more details on legal costs, read this guide on settlement agreement legal fees.
What is a Protected Conversation?
A protected conversation is an ‘off-the-record’ discussion between you and your employer aimed at exploring the possibility of ending your employment through a settlement agreement.
The purpose of protected conversations is to encourage open dialogue, allowing both parties to negotiate freely. If you’re invited to discuss a potential settlement at a protected conversation, read this article: Protected Conversations: Essential Tips for Employees at Work.
What is a Reasonable Settlement Payment?
A fair settlement offer should reflect the value of the legal rights you’re giving up. To assess whether the offer is reasonable, consider factors such as:
- The reason your employment is ending
- Whether you’ve been treated fairly
- Your salary and employment duration
- How long it may take you to find a new job
Your solicitor will help you evaluate these factors to determine whether the offer is fair and if you might have a valid claim against your employer. The amount offered should account for any potential claims you are giving up, as well as the likelihood of success in an Employment Tribunal.
For more guidance on settlement amounts, visit this page on determining fair compensation in a settlement agreement.
Are Settlement Agreements Taxable?
A common concern is whether the payment from a settlement agreement is subject to tax. Generally:
- The first £30,000 of a termination payment, including redundancy, is exempt from tax.
- Contractual payments, such as salary, bonuses, and holiday pay, are taxable.
- Payments in lieu of notice (PILON) are also taxable.
For more information on how tax may affect your settlement, see this article on settlement agreement taxation.
How Long Should You Have to Consider a Settlement Offer?
The law doesn’t specify a minimum time to consider a settlement agreement. However, the ACAS Code of Practice recommends a minimum of 10 days to consider the terms and receive independent legal advice.
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 decide whether or not to accept the settlement agreement.
Can you Negotiate a Settlement Agreement?
Yes, settlement agreements can be negotiated. While some employees are satisfied with their initial offer and wish to move on, others may feel the offer doesn’t reflect what they deserve. In such cases, it might be worth negotiating for a better settlement.
It’s often better to negotiate a settlement based on goodwill, especially if you’ve contributed significantly to the company. For more tips on negotiation strategies, check out this guide to negotiating settlement agreements.
Even if you feel you have a strong claim against your employer, entering into a settlement agreement may still be better because:
- Tribunal Risks: Employment Tribunals can take months and may be emotionally taxing.
- Stress and Delays: A Tribunal claim can cause significant delays in receiving compensation, which can be stressful.
- Uncertainty: However strong your case is, there’s no guarantee of success.
For more information about the risks of a tribunal claim, read: 7 Reasons Why a Settlement Agreement Beats an Employment Tribunal Claim
What Happens if You Sign the Settlement Agreement?
Once you sign the agreement, you waive your right to pursue any employment-related claims against your employer. Therefore, it is crucial to obtain the right legal advice.
Sometimes, employers offer settlement agreements even when parting on good terms, often as a precautionary measure. While the agreement may list many potential claims, what’s important is that by signing, you forgo any right to make a claim.
If you feel you have a strong case for a claim, inform your solicitor, who will evaluate whether the settlement amount is fair.
What Happens if You Refuse the Settlement Agreement?
You are free to decline any settlement offer. If you refuse, your employer may either make a better offer or proceed with terminating your employment.
What You Lose by Refusing
- You won’t receive the compensation payment, which is only available if you agree to the settlement.
What You Still Receive
If your employment is terminated without a settlement, you’re still entitled to:
- Notice pay (unless your dismissal is for gross misconduct)
- Statutory redundancy pay (if applicable)
- Payment for any accrued but unused holiday
Pursuing a Claim
If you refuse the settlement, you retain the right to pursue a claim through the Employment Tribunal, which may lead to a higher award if your case is strong. However, the process can be lengthy and uncertain.
What Else Can You Expect to Find in the Settlement Agreement?
Each settlement agreement is unique, but there are several common clauses that employees can typically expect to find. These clauses address specific aspects of the employment termination and the terms of the agreement, helping to clarify both parties’ obligations and rights.
Holiday Entitlement
If you haven’t taken all your holiday entitlement by the time your employment ends, you can receive payment for the days you’ve accrued but not used. However, this generally applies only to your statutory holiday entitlement, not any extra holidays provided under your employment contract.
Reasons for Termination
Your employer doesn’t always have to provide a reason for terminating your employment in the settlement agreement. However, if a reason is given, it must be consistent with any references your employer provides.
The reason for termination might also be important if you have certain insurance policies, such as Income Protection Insurance. Some policies only provide payouts if the reason for termination is redundancy. It’s essential to clarify this with your solicitor if you have such coverage.
Will You Get a Reference?
An employer is not legally obliged to provide a reference for an ex-employee. However, it’s common practice for settlement agreements to include a clause ensuring that the employer will provide a reference in an agreed form. This is usually attached to the agreement as an annexe or schedule. Typically, the reference will be very basic, covering only the start date, end date, and job title. This type of simple reference is often sufficient for future employment prospects.
If you require a more detailed or personalized reference, you may need to request one from a former manager or supervisor as a personal reference. This is particularly useful if a basic reference won’t meet your needs for future job applications.
Garden Leave
A settlement agreement may place the employee on garden leave until the termination date. Garden leave allows the employee to stay at home, effectively suspending them from active duties while remaining on the payroll until their employment officially ends.
During this period:
- You remain employed and are still subject to your employer’s authority.
- You are typically not required to come into the office or carry out work.
- You must still adhere to company policies, such as booking time off for any holidays during this period.
Garden leave usually aims to protect the employer’s business interests, such as maintaining confidentiality or preventing access to sensitive information before an employee departs. Many employees appreciate garden leave because they continue to receive their salary while not being required to work.
The Adviser’s Certificate
Most settlement agreements require the employee’s legal adviser to sign a certificate, confirming that the employee has received independent legal advice on the terms and effect of the agreement. This certificate confirms that the adviser is suitably qualified and insured to provide such advice, and it’s a legal requirement for the settlement agreement to be enforceable.
Costs Contribution
There will usually be a clause in which the employer agrees to cover a portion of your costs for obtaining legal advice on the settlement agreement. This is typically done to ensure that the employee can afford to get the legal advice required to sign the deal.
The amount the employer contributes towards your legal fees may vary depending on the complexity of the agreement and the solicitor’s fees. In most cases, the contribution should be enough to cover the total cost of the advice.
Need a Free Consultation About Your Settlement Agreement?
If you’ve been offered a settlement agreement, you must seek legal advice. We offer a free consultation to discuss:
- How the agreement would affect you
- Whether the offer is fair or if there’s room for negotiation
- Any tax implications and how to structure payments efficiently
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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Andrew Crisp is the Principal Solicitor at Mason Bullock Solicitors, where he specialises in employment law and dispute resolution. With over two decades of legal experience, Andrew has built a reputation for his expertise in advising employees on settlement agreements and helping clients navigate complex litigation processes, including the removal of County Court Judgments (CCJs).