What is a settlement agreement?

A settlement agreement is a legally binding contract used to prevent employees from bringing certain legal claims against your employer, and usually involves a sum of money being paid to the employee in return.

Properly drafted settlement agreements are legally binding, and this relies on the fact that the employee has received independent legal advice on the terms and effect of the agreement. In most cases, the employer will contribute towards the cost of this independent legal advice.

If you’ve been offered a settlement agreement by your employer, speak to our expert employment lawyers for quick, effective advice on the term and effects of the agreement to ensure they’re in your best interests. Call us on 0330 041 5869, or contact us here.

Why do employers use settlement agreements?

The signing of a settlement agreement provides both you and your employer a sense of security. Your employer has the guarantee that you won’t make a claim against them further down the line, and you’ll be reassured of the financial settlement aspect of your termination, as well as any future job reference.

When might a settlement agreement be offered?

Settlement agreements can be offered in a range of scenarios but are most commonly used by employers to terminate an employment contract on a mutually agreed basis.

You might also be asked to sign a settlement agreement to bring an ongoing employment dispute to an end. Our employment lawyers have the experience to help you manage any ongoing employment disputes, and work with authority and efficiency to ensure that justice is reached.

Can I request a settlement agreement?

Usually, settlement agreements are offered by an employer to an employee. However, you can also enter into off the record discussions with your employer to ask for a settlement. This may be on occasions you’ve raised a grievance, or you feel the relationship has broken down.

In many instances, your employer may already be aware of the situation influencing your decision and will welcome the opportunity to settle the matter without it being taken further to employment tribunal.

If you’re considering approaching your employer with a proposal for a settlement agreement, we highly recommend seeking legal advice in the first instance. This will ensure that your discussions are protected and remain confidential, and you don’t undersell any offer you may make. Strategy is important when trying to negotiate an offer, and we’re here to offer expert help on your settlement agreement. Simply call us on 0330 041 5869, or request a call back.

What can be included in a settlement agreement?

Other than financial compensation, employees can negotiate other terms in their settlement agreement. For example, it can be confirmed in a settlement agreement that your employer will provide a reference to future employers. Before signing, you can even agree the wording of the reference as well as specify a period within which the reference must be provided. You can agree bonus payments and what your colleagues will and will not be told.

When you work with our employment specialists, additional request can also be handled during the negotiation period of the settlement agreement. It’s always important to obtain expert legal advice so you’re fully aware of your options.

Do I have to agree to a settlement agreement?

One thing that’s important to remember is that settlement agreements are always voluntary. You must be given a reasonable period of time to consider the conditions of the proposed agreement, for which ACAS recommends at least 10 calendar days.

If you’re still unhappy with the terms of your agreement, after considering it with an employment lawyer, you’re under no obligation to agree to it. At this point, it’s possible to enter further negotiations to reach an agreement, which your lawyer can help with.

What should you ask for in a settlement agreement?

If you’ve been offered a settlement agreement from your employer, there are a number of questions you should ask to ensure that you’re being provided with the best deal. When you work with our employment experts, you can rest assured that every aspect of the agreement has been carefully questioned and considered to achieve the best outcome possible.

Some important questions to ask when considering your settlement agreement include:

• Has my financial settlement been valued correctly?
• Have I been offered a reference as part of the agreement?
• Are there any restrictive covenants included?
• Will any outstanding bonuses be paid?
• Do I have to pay tax?

Our employment lawyers know that there’s a lot to consider when you’re offered a settlement agreement. When you work with us, we’ll guide you through the proposed agreement and make sure you’re entirely comfortable before signing anything.

What happens if you waive your employment rights?

As part of signing a settlement agreement, employees can ‘waive’ (i.e. sign away) many of their contractual rights (set out in your contract of employment) or common law rights rights (derived from general law in relation to your treatment by your employer).

Because of this, the law requires employees that’ve been offered a settlement agreement to take professional advice through a lawyer, their trade union or ACAS. To waive their statutory rights, employees must’ve agreed either:

• To sign a valid settlement agreement with the assistance of a trade union adviser or lawyer, or

• To sign an ACAS settlement (called a ‘ COT3’), usually after legal proceedings have been commenced.

What happens if you don't sign a settlement agreement?

If you choose not to sign the settlement agreement, your employment lawyer can advise you of the consequences, which may include termination of your employment. You should also be aware that your employer won’t contribute to your legal fees if you don’t sign the agreement.

If you still wish to pursue a legal claim against your employer, there are strict time limits in place. This is usually one day less than three months from the date of the dispute or termination of employment, but can vary from case to case.

For advice about pursuing a claim against your employer, and the time limits involved, talk to our specialist employment lawyers on 0330 041 5869, or request a call back.

Are settlement agreements subject to tax?

Payments made subject to a contract of employment are normally subject to deductions for income tax and national insurance contributions (NICs). However, tax issues in employment cases are complicated and will vary from case to case. In some instances, you may be entitled to receive up to £30,000 without tax deductions, if it’s paid as compensation for losing your employment.

Where your employer offers to make a termination payment free of tax, you may be asked to indemnify it against the risk that the HM Revenue and Customs decides to tax it after all. When you work with our expert lawyers, we’ll advise you on the effect of any such clause and can even suggest drafting changes the clause.

What happens if a settlement agreement is breached?

If you breach a clause that you’ve signed, your employer may argue they no longer have to fulfil their side of the agreement. You can be refused the settlement payment, or your employer may try to reclaim money that has already been paid.

The agreement will usually contain a confidentiality clause which restricts you from speaking negatively about your employer and could also include a restrictive covenant which prevents you from working for a direct competitor for a particular length of time. Because of this, it’s important to thoroughly review the terms of the agreement with a specialist employment lawyer.

Why might you receive a settlement agreement whilst off sick?

If you’ve been absent from work due to a terminal illness, you’re protected against disability discrimination under the Equality Act 2010. Still, it may be that you’re no longer able to work in your role due to the deterioration of your health.

If this is the case, you may be able to resign from your role in return for an ex-gratia payment, or a goodwill payment. This’ll be accompanied by a settlement agreement to prevent you from bringing a disability discrimination claim against your employer.

There may also be other reasons in that your employer does not want to manage your sickness absence or has found a replacement for your role.

Settlement agreement costs:

The successful signing of a settlement agreement relies on the independent legal advice provided to you as the employee. It’s therefore common for the employer to offer to pay a contribution towards the legal costs incurred by the employee, although this isn’t a legal requirement. This contribution normally ranges from a minimum of £250 to a maximum of £1,000, and may or may not include the VAT element.

The present ‘going rate’ varies across the country and within industries and may depend upon the amount of compensation being paid to the employee. In certain cases, we may be able to negotiate better contributions, particularly for more senior employees and/or where the legal dispute or the negotiations are complex.

The more the employer will pay, the less likely it is that you’ll have to pay anything to your employment lawyer. However, factors that may increase your costs above the contribution are:

• You ask us to advise you on whether the agreement represents a good deal (see above)

• You ask us to negotiate directly with your employer or their solicitors regarding the amount of money on offer or the wording of the agreement

• You ask us to advise on any additional rights you may have, such as under share option schemes. In those circumstances, we’ll need to see the terms of the scheme to be able to properly advise

• You ask us to negotiate directly with your employer or their solicitors regarding the drafting of the agreement itself.

In such cases, your employer’s proposed contributions are unlikely to cover the additional cost of such work. If we’re unable to secure an increase, you’ll be responsible for the balance, and we may ask you for a payment on account of our costs. Rest assured, our experts will explain costs from the outset and alert you throughout the process of whether additional costs will be incurred before proceeding.

Here at Slater and Gordon, our settlement agreement solicitors give straightforward legal advice on the terms and conditions of settlement agreements. We offer quick, flexible services to suit your needs and time frame, and in most cases your employer will cover your legal fees.

If you need assistance or independent legal advice on a settlement agreement, then our expert employment lawyers can help. Call us today on 0330 041 5869 or request a call back.