An Employee’s Guide to Settlement Agreements

Settlement agreements can apply in various circumstances, such as redundancy, dismissal or settling employment tribunal claims.

Usually, the employer wants to end your period of employment and this type of agreement enables both of you to make a clean break.

Settlement agreements offer an alternative to going through the tribunal or redundancy process and can provide a faster, more streamlined resolution.

If you enter into a settlement agreement, you do this voluntarily, but once you do, it becomes a legally binding document.

Before providing you with a written settlement agreement, your employer should discuss it with you first. They can begin these discussions at any time and may make an offer to you in writing or verbally.

You should expect this proposal to include an idea of what terms of compensation are on offer and why the employment is making the settlement offer in the first place.

You should agree with the employer what terms the agreement should include, for these to be written into the final document.

This written settlement agreement should contain:

• Settlement payment details, and
• Non-financial terms.

Non-financial terms usually include your employer’s reference for you and various confidentiality clauses.

Confidentiality clauses prevent you from telling anyone else the reasons for the settlement or what it includes.

You may also find clauses preventing you from making derogatory comments about your employer after you’ve left their employment.

There are likely to be several factors that influence the settlement amount your employer offers you:

• The reasons for offering the settlement
• How long and costly it would be to resolve any issues without it
• How long you have worked for them
• How difficult it would be to fill your position
• How long it could take you to find a new job.

You should expect a clear breakdown of payments that the settlement agreement offers. The agreement should also be clear about the tax position of these payments.

At present, you can receive up to £30,000 tax-free. HMRC has rules about taxation of termination payments. Therefore, it makes sense to check first by seeking professional advice.

The other name for a settlement agreement is a compromise agreement. Both parties – you and your employer – should agree on the terms included. Therefore, reaching this agreement is a process involving discussion and negotiation.

Remember, a settlement agreement is voluntary. You do not have to sign it if you’re not happy with the terms.

Don’t be rushed into deciding. The recommended time to consider a proposed settlement is a minimum of 10 days.

If you feel pressured to sign the agreement at any time, this could give you grounds to claim for unfair dismissal.

You can also ask for someone else to be present at negotiations with your employer, such as a trade union representative or work colleague.

Discussions with your employer should be transparent, and both parties should agree in advance that anything covered in these discussions cannot be admissible in any future proceedings.
You should aim for open and productive negotiations, to ensure you reach the most satisfactory agreement.

For your settlement to proceed, you have to receive a formal written agreement. It must meet these statutory requirements:

• The agreement must be in writing
• It must relate to a specific complaint or proceedings
• An independent lawyer must advise you on the terms of the agreement
• The agreement must set out what it intends to do
• It must state that it meets these statutory requirements.

Without meeting these requirements, your settlement agreement cannot become a legally binding document.

The solicitor has a crucial role here. It is a legal condition that you receive independent, professional legal advice before signing the settlement. This applies to any agreement where you will be waiving your right to take legal proceedings.

The agreement itself must name this independent legal adviser.

When meeting your solicitor to get this advice, you should include your current employment contract so that the solicitor can compare it with the clauses in the agreement.

Your solicitor will explain the terms in the settlement to you and the impact of the agreement on your ability to pursue any future employment claims. They will look at specific wording in the document and help you should you wish to negotiate the content. Please bear in mind that future claims, which may be unknown at the time of signing the settlement agreement, can be settled if the waiver in the agreement is worded correctly.

You should only sign the formal written agreement when you’re satisfied with what it says. The solicitor will sign a certificate to confirm that they’ve given you their advice.

When faced with an employer’s breach of a settlement agreement, employees can take several steps. First, they should review the agreement to understand their rights and the breach. Open communication with the employer might lead to a resolution through negotiation or mediation. If informal methods fail, employees can consider legal action, either to enforce the agreement or seek damages. Consulting an employment attorney for advice tailored to the situation is crucial. Maintaining records of communications and evidence is important if legal steps are pursued.