The basics of settlement agreements
A settlement agreement is a contract between you and your employer that says, “You’ll be entitled to receive X, but in return, you can’t make a claim against us.”
If you’re being made redundant, you may also lose your statutory redundancy pay. Some settlement agreements may also include a confidentiality clause.
In most cases, the “X” in your agreement will be financial compensation, money you are owed, and a good reference from your employer so you can find another job. Companies often prefer settlement agreements because it is quicker, easier, and cheaper to settle matters out of court than defend themselves at a tribunal. They may also use them to avoid lengthy processes, such as redundancies.
Signing a settlement agreement means you are guaranteed what is included in the agreement because it becomes legally binding. But it also means you cannot take legal action for the specific dispute or process the agreement covers.
Find out more in our guide, Settlement agreements: the what, why, and when.
You don’t have to accept a settlement agreement
The first thing to remember is that you do not have to sign any settlement agreement. If you do sign one, it must be voluntary. Your employer cannot pressure you to sign, and you should be given a minimum of 10 days to decide whether to accept.
Before you can legally sign a settlement agreement, you must take advice from an independent adviser. This is usually a solicitor or union representative.
Employment solicitors can assess what you are being offered, check the legality of the agreement, and advise whether you should accept the deal.
You will usually be advised to accept a settlement agreement if:
- It offers more, as much, or almost as much as you could potentially win at an employment tribunal
- You are unlikely to win a claim against your employer
Your solicitor will also look for other possible breaches of the law. Have you been discriminated against at work? Could this amount to unfair dismissal? If they identify a separate legal issue, you could be awarded more at a tribunal and a settlement agreement may put that at risk. You may also have to pay tax on what may initially seem like a generous settlement.
Remember, if you choose to reject the settlement agreement, your employer can still dismiss you.
You can negotiate the agreement
If your solicitor advises you not to sign a settlement agreement, that does not necessarily mean you must reject it outright. Negotiation is often an important part of the process. From the start, you and your employer should be working towards terms that both sides can accept.
When you are presented with a settlement agreement, you are within your rights to ask your employer to reconsider what is being offered. Your employer is also within their rights to say no.
If both sides are willing, settlement agreements can be negotiated either by you or by your solicitor.
If you choose to negotiate yourself, you may be allowed to bring a companion if, for example, English is not your first language or you have a disability. However, it is usually best to let your legal representative negotiate on your behalf if they believe a better deal is possible.
If you fail to reach an agreement and make a claim at a tribunal, you will not usually be allowed to refer to discussions that took place during the negotiation period.
What is a settlement agreement?
A settlement agreement is a formal contract between an employer and an employee. It is often used to resolve workplace disputes or to set out the terms of an employment relationship coming to an end.
It will usually include financial compensation for the employee and may also cover other matters, such as confidentiality clauses.
In return, the employee agrees not to take legal action against the employer in relation to the dispute.
It is important that both parties fully understand and agree to the terms before signing.
Is opting for a settlement agreement beneficial?
Whether a settlement agreement is beneficial depends on the circumstances of both the employee and the employer.
For employees, it can offer a quicker resolution and financial support without the need for a lengthy legal battle.
For employers, it can reduce the risk of legal disputes and help protect the business’s reputation.
That said, it is important to consider whether the terms are fair. Legal advice is often the best way to make sure your rights are protected and the agreement is in your best interests.
What amount should be proposed in a settlement agreement?
The amount offered in a settlement agreement can vary depending on factors such as your salary, length of employment, reason for termination, and any legal claims you may have.
The amount should fairly compensate you for the loss of employment and any rights or claims you may be giving up.
Employers often start with a calculation based on weekly earnings and length of service, but negotiations are common and may result in a higher figure.
What are the legal prerequisites for a settlement agreement?
For a settlement agreement to be legally binding, it must meet several conditions:
- Documented in writing: The agreement must be set out in writing.
- Specific complaints or proceedings: It must relate to specific complaints or legal proceedings.
- Independent legal advice: The employee must receive independent legal advice from a qualified professional, such as a solicitor, who can advise on the terms and effect of the agreement.
- Identification of legal adviser: The legal adviser must be clearly identified.
- Adviser’s professional indemnity insurance: The adviser must have professional indemnity insurance in place to cover the risk of a claim arising from the advice given.
- Voluntary agreement: Both parties must agree to the terms freely, without pressure or coercion.
- Clarity of terms: The terms must be clear and easy to understand.
- Statutory compliance: The agreement must confirm that the relevant statutory conditions for settlement agreements have been met.
Meeting these requirements is essential to ensure the agreement is valid and enforceable.
You should sign when you’re ready
When you accept a settlement agreement, you should feel confident that you are getting the best possible offer. You should also understand exactly what signing means and what you may gain or lose.
Because a settlement agreement is only legally binding once you have taken advice from a solicitor or other independent adviser, some employers will offer to cover the cost of that advice. However, you do not have to use the adviser they suggest and are free to choose your own.
Just give us a few details and The Law Superstore can help you compare and connect with employment solicitors who can support you with your settlement agreement.