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What to do if you’re offered a Settlement Agreement

Receiving a Settlement Agreement from your employer can feel overwhelming, especially if you weren’t expecting it.

However, these agreements are more common than many people realise and can often benefit both employees and employers. They can even provide a structured and amicable way for employees to leave their roles.

Amanda Hyam, our Head of Dispute Resolution and Employment, is here to offer you guidance on what you should do if your employer offers you a settlement.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding document in which an employee agrees not to pursue legal claims against their employer in exchange for compensation.

While these agreements are often used when employment is ending, they can also apply in situations where employment continues.

Amanda says: “The offer could be their way of avoiding the costs, time, and potential negative publicity that come with defending a case at a tribunal.

“It might also simply be part of the employer’s usual process, especially if they’re handling something like planned redundancies and offering settlements to employees in similar situations.”

Key legal requirements

For a Settlement Agreement to be valid under UK law, specific conditions must be met, as outlined in the Employment Rights Act 1996:

The Settlement Agreement must be in writing.
It must relate to particular complaints or legal proceedings.
The employee must receive advice from a qualified independent adviser on the terms and implications of the agreement.
The adviser must have professional indemnity insurance.
The agreement must specify who provided the advice.
The agreement must confirm it satisfies the legal requirements for such agreements.

These requirements are designed to ensure that employees fully understand the agreement’s implications and are protected when waiving their legal rights.

What terms can you expect to find in your agreement?

While every Settlement Agreement is unique, they often include several common elements:

Details of a lump-sum payment from the employer regarding the termination and any associated loss of employment.
Provisions for handling the employee’s notice period and payment for any unused holiday entitlement.
An agreement that the employer will provide a reference for the employee.
A commitment from the employee not to pursue any legal claims against the employer.
Clauses outlining confidentiality requirements regarding the agreement and its terms.
Instructions for the return of company equipment or other assets.

Compensation payments up to £30,000 are generally tax-free. However, payments covering notice periods or other taxable elements may be subject to deductions.

Steps to take if you are offered a Settlement Agreement

Your first step is to seek independent legal advice, as this is a legal requirement for the agreement to be legally binding.

Request a draft of the agreement from your employer to share with your adviser. This will give them the opportunity to carefully review the terms, explain the claims you may be waiving by signing, and assess whether the offer is fair and reasonable.

“If the initial terms don’t meet your expectations, your adviser can negotiate on your behalf to secure a more favourable outcome,” explains Amanda.

However, bear in mind that while employers often contribute to legal fees, their contribution may not always cover the full cost of extended negotiations.

If you’ve been offered a Settlement Agreement and need expert guidance, don’t hesitate to get in touch with us for tailored advice.

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.