We regularly support individuals who have either been offered a settlement agreement by their employer or who wish to approach their employer to ask for one. If you are in this position, or have been invited to have a without prejudice discussion or a protected conversation with your employer, then you will understandably have questions.

It is a big deal leaving a job and therefore essential that you have the right legal advice so you know where you stand.

So what is a settlement agreement?

A settlement agreement is a legally binding agreement where you agree to waive (i.e. give up) your employment rights and settle any potential court or tribunal claims, normally in return for financial compensation. They used to be known as 'compromise agreements' but the name changed in 2013.

Typically a settlement agreement brings your employment to an end, with parties often looking for a 'clean break'. However, there can sometimes be bespoke arrangements where an employee continues working in some capacity. In such circumstances the right advice is essential to ensure you are not giving up more rights than you should be.

Why might I be offered a settlement agreement?

There are any number of reasons why you may be offered a settlement agreement (e.g. redundancy, breakdown in relationships or alleged performance/conduct issues) and it is important that you make your adviser aware of the background so that they can identify what claims you are likely to have, what the likely award would be if you made a claim rather than entered into a settlement, and whether or not the settlement being proposed is reasonable, or whether you should be looking for a better settlement.

Do I need to speak to a lawyer?

You need to take legal advice on the terms and effect of a settlement agreement, otherwise it will not be effective (in terms of you waiving your rights). As a protective measure, to make sure that employees receive appropriate advice before waiving important employment rights, the legislation specifies that an employee must obtain advice from a relevant independent adviser. Usually, this will be a lawyer.

What about legal fees?

Usually an employer makes a contribution to the employee's legal fees in recognition that they have to take this advice. This may not cover all of your legal fees, particularly if you want to get into negotiations about what is being offered. The legal fee contribution can sometimes be negotiated upwards.

Can I ask my employer for a settlement agreement?

This is possible, albeit less commonly done. In theory, there is no reason why you could not approach your employer to ask for a settlement agreement, but it is important that you take advice on your position prior to commencing such a discussion - without the benefit of legal advice you could undervalue your potential claims and end up settling for less than you should.

What is normally in a settlement agreement?

The settlement agreement will set out the terms under which you will be agreeing to give up your employment rights. It should make clear what payments you will receive. Normally this will include:-

  • salary and benefits to the termination date;
  • notice pay;
  • accrued holiday pay; and
  • a compensation payment, which might include your entitlement to statutory redundancy pay (if applicable).

Settlement agreements often also contain clauses covering future behaviours (on both sides), including:-

  • confidentiality;
  • the giving of references to future potential employers;
  • what statement will be made to colleagues/third parties about your departure;
  • not making derogatory comments about each other; and
  • returning Company property.

Your adviser will be able to explain the effect of these clauses to you and tell you if the wording is reasonable.

My employer has said that any payment can be made tax-free. Is that correct?

This depends on the nature of the payment. Contractual payments, such as salary, holiday pay and notice pay must have tax and NI deducted at source. Genuine compensation can be paid tax-free up to a limit of £30,000. You should take advice on this and not necessarily rely on what your employer has said.

How long do I have to consider the terms of the settlement agreement?

Your employer will usually give you a deadline to return the signed settlement agreement to them. Your employer should though give you a reasonable period of time to consider the proposed settlement agreement. How long is reasonable will depend on the circumstances, but as a general rule the ACAS Code of Practice on Settlement Agreements states that you should be given at least 10 days to consider the formal written terms of the agreement and take legal advice.

Do I have to accept a settlement agreement?

No, you don't. A settlement agreement is voluntary and you cannot be compelled to sign it. However, the right adviser will be able to explain what the likely consequences of rejection will be (e.g. continuation of a redundancy or performance process) and the associated financial implications so that you can make an informed decision.