Guide to Settlement Agreements for Employees

It can be confusing to understand why you have been offered a Settlement Agreement by your employer, and what it means for you. Read on for our comprehensive guide to Settlement Agreements for employees.

A Settlement Agreement (formally known as a Compromise Agreement) is a legal contract between an employee and an employer. In signing it, the employee waives their rights to pursue any kind of legal claim against the employer in the future. The employer typically offers some type of incentive in return – usually a sum of money.

Why am I being offered a Settlement Agreement?

There are lots of reasons why you might be offered a Settlement Agreement. Often, it is because your employment is coming to an end, whether through redundancy or dismissal. Your employer wants to protect themselves against the risk of future claims and so asks that a Settlement Agreement is put in place.

You might be surprised by this, especially if you are leaving on good terms, but it is effectively an insurance policy for your employer.

There may also be a situation in which you are offered a Settlement Agreement following a workplace dispute. This might relate to pay, annual leave, or harassment, for example. Rather than resolve the issue through the court system, your employer may suggest a Settlement Agreement instead. This would provide you with a financial award for your damages, and in turn, you waive your right to pursue a claim at the Tribunal.

Therefore, you may be offered a Settlement Agreement, even if you intend to remain with the same employer. It is a common misconception that Settlement Agreements are only used when an employment contract is being terminated. However, that is not exclusively the case.

Request for a Legal Consultation

Garner & Hancock realise that the prospect of pursuing a legal matter can be challenging, so we offer an initial phone consultation to discuss your options, and to give you information that will help you make the right choices affecting your case.

Do I have to accept a Settlement Agreement?

You do not have to accept a Settlement Agreement. Your employer cannot pressure you into signing – it is entirely voluntary and the decision must be yours.

There are some things that you should consider when weighing up your decision. For example, if your employer has breached your contract or employment rights, you may have grounds to pursue a claim at an Employment Tribunal instead. However, this will take time and energy, and there is no guarantee that your claim will succeed.

Having said that, you should not accept a Settlement Agreement if the terms are unfair. As mentioned above, you will likely be offered a severance package. This should be comparable to the amount you would expect to be awarded by the Employment Tribunal. If the offer falls short of this, you are perfectly entitled to negotiate better terms.

If you are not sure whether your Employee Settlement Agreement is fair, do not worry. You have to get independent legal advice from a qualified professional before signing a Settlement Agreement. This is a legal requirement. More often than not, your employer will cover this cost. A solicitor can tell you whether the terms of your proposed Settlement Agreement are suitable.

If you wish to reject the Settlement Agreement and pursue a claim through the Employment Tribunal instead, then you must act quickly. Most claims must be made within three months.

Negotiating a Fair Employee Settlement Agreement

If you want to negotiate the terms of the Settlement Agreement, you can do this directly with your employer. Or, you can ask a solicitor to negotiate on your behalf. This fee may not be covered by your employer, so you need to check whether you are liable for the cost. These negotiations are confidential, meaning they cannot later be raised in the Tribunal.

What should a Settlement Agreement include?

All Settlement Agreements are different. In order for it to be valid, it must be in writing and must contain a list of the types of claims you cannot bring against your employer. You must have sought independent legal advice and this advisor must be named in the agreement. It must also be signed by you and your employer.

Most Settlement Agreements will stipulate a severance or termination package. This will typically include a sum of money. Your employer may also agree to provide a reference, the wording of which will usually be agreed upon before you sign the contract. The agreement should also deal with any wages, benefits, bonuses, and other payments that you are owed.

What are the consequences of signing a Settlement Agreement?

If you sign a Settlement Agreement, it is considered legally binding and you cannot bring a claim against your employer in the future. The only exceptions to this rule are if:

  • Your employer breaches the terms of the Settlement Agreement
  • You have a latent personal injury as a result of a workplace injury or illness. This means the symptoms only appeared after you signed the agreement
  • You are being denied accrued pension rights

There may also be a confidentiality clause, meaning you cannot tell anyone about the Settlement Agreement, other than your close family and professional advisors.

A Settlement Agreement is a legal contract. As such, it is full of technically written clauses. That is why you must seek legal advice before signing. A solicitor can talk you through the terms and make sure that you understand the implications.

Will a Settlement Agreement payment be taxed?

The first £30,000 of your severance payment is tax-exempt. Other payments, such as wages, holiday pay, and bonuses will be taxed. Payment in lieu of notice (PILON) may also be taxed if it is contractual.

What should I do if I’m offered a Settlement Agreement?

If you are offered a Settlement Agreement, think about what your preferences are. Would you be happy to settle a workplace dispute or redundancy in return for a certain amount of money? And how much money would you consider acceptable? Or are you concerned about waiving your right to bring a claim against your employer?

Then, seek legal advice from a solicitor. A solicitor can discuss the terms of the proposed settlement with you, advising whether or not it is fair. Your employer must give you time to consider the offer. ACAS recommends a minimum period of 10 calendar days.

Speak to our Settlement Agreement solicitors

If your employer has offered you a Settlement Agreement, please contact us at Garner & Hancock Solicitors. We provide clear, practical legal advice. We can explain your employment rights in greater detail, suggesting whether the terms of the agreement are fair – or whether it is in your best interests to negotiate.

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