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What employees need to know about settlement agreements

Employment relationships do not always run smoothly. In some cases, they may break down to such an extent that it may be necessary for the working relationship to be ended.

One way of facilitating the end of the relationship is through the use of settlement agreements.

Head of Dispute Resolution and Employment, Amanda Hyam, explains what you need to know about settlement agreements.

What are settlement agreements?

A settlement agreement – previously known as a compromise agreement – is a legally binding contract made between an employer and employee, either towards the end or just after employment has ended.

An agreement sets out the financial and other terms on which an employer and employee will go their separate ways.

Settlement agreements are legally binding, entered into voluntarily, and agreed through negotiation.

Usually, they include a severance payment made by the employer in return for you, the employee, agreeing not to bring certain legal claims.

What does a settlement agreement include?

Every settlement agreement is unique because the circumstances of each case will be different.

However, there are some elements that are common to most agreements.

Typically, they will contain details of:

The amount of money you will be paid (which may include payments for redundancy, outstanding wages, bonuses, pay in lieu of notice, accrued holiday pay and an “ex gratia” or compensation payment).
Any restrictions on your future employment.
Confidential business matters, such as trade secrets.
A confidentiality clause to bar you from telling anyone you have signed a settlement agreement or to allow you to tell people you have done so, but not to discuss the contents.
The reference that will be provided by your employer upon request.
Whether there will be an announcement made to your colleagues/clients.
A mutual agreement that you and your employer will not make derogatory comments about each other.
Who is liable for any tax or National Insurance (NI) due.
Your employer’s contribution to your legal fees – while they are under no obligation to do this, it is usually the case that they will make a contribution of between £250 to £1,000 (inclusive or exclusive of VAT). This contribution usually covers advice in relation to the terms of the agreement and the signing of the agreement.

You cannot be asked (and you are not allowed to agree) to waive a possible future claim for a personal injury that neither you nor your employer is aware of, for example, for a condition such as asbestosis that can take many years to develop.

You are also not allowed to contract out of any accrued pension rights.

Compensation for loss of employment (including a redundancy payment) is usually tax-free up to £30,000, but specialist advice should be sought about taxation of severance payments.

Why is your employer suggesting a settlement agreement?

There are various reasons why an employer may offer you a settlement agreement:

Commercial reasons.
Preference for a “clean break.”
Not enough time to go through a full performance management or disciplinary process.
A desire to protect their firm by stopping you from making a potential employment tribunal claim at a later date.

It is important to understand that, once a settlement agreement has been signed by both you and your employer, you cannot make any claims to the Employment Tribunal.

This is why it is crucial that you seek legal advice to ensure that you have explored all your options before signing away your right to have your case heard by a Tribunal panel.

Pre-termination negotiations

The Government has taken steps to encourage greater use of settlement agreements to end employment relationships by mutual agreement

The Government has also introduced a mechanism whereby employers can initiate “pre-termination negotiations” to discuss an amicable parting of the ways before a formal dispute arises.

There are strict rules about conducting these pre-termination negotiations. For example, they only stop you from taking your case to an Employment Tribunal in the event of an unfair dismissal claim, not in other types of claims, such as discrimination.

While pre-termination negotiations are going on, you will continue to enjoy full protection of your employment rights, as you can choose to reject the offer of a settlement agreement and proceed to a tribunal.

Legal implications

To be legally valid, the settlement agreement must comply with a number of conditions.

It must be in writing.
It must relate to a particular complaint or legal claim.
You must have received legal advice from a solicitor or approved adviser, on the terms and effect of the proposed agreement and its effect on your ability to take a claim to an Employment Tribunal. It is standard practice for the solicitor/adviser to sign a certificate confirming that they have provided such advice.
Your solicitor/adviser must have professional indemnity insurance to cover the risk of a claim by you in relation to the advice provided.
The agreement must state that the conditions regulating settlement agreements have been satisfied.

Seeking legal advice is essential if your employer invites you to end your working relationship using a settlement agreement.

Pursuing a settlement agreement

If you are being asked to consider a settlement agreement, it is vital that you seek independent legal advice before signing any documents.

At Mander Hadley, our friendly and knowledgeable team of employment law experts can guide you through the process and ensure that the settlement agreement is fair.

Once signed, there is no going back – a settlement agreement is legally binding.

For expert advice and guidance tailored to your situation, contact us today.

Amanda Hyam

Head of Dispute Resolution and Employment

I have specialised in Dispute Resolution, Civil Litigation and Employment law for more than 15 years. I understand how daunting the prospect of litigation can be and because of this I am always available to discuss concerns.