What is a Settlement Agreement and Why is It Important?

If you’ve entered into a workplace dispute, a settlement agreement could help resolve the matter rather than taking your claim to an employment tribunal.

What is a settlement agreement?

A settlement agreement is a legal contract between you and your employer, which prevents a workplace dispute going to an employment tribunal.

You and your employer will typically agree on the contents together. This will usually include a breakdown of payments due to you, an agreement to provide a reference for you, and a timetable of events. These terms will then be drawn up in writing and voluntarily signed by both parties.

Once the agreement is signed, the matter is considered legally ‘settled’. You should walk away with a good deal – for example, getting paid what you’re owed, compensated where necessary, or even  just guaranteed a reference so you can get another job. Depending on your employment claim, the agreement might also offer you your job back.

In return, you’ll be agreeing to waive your right to make a claim against your employer. You don’t have to accept the terms of a settlement agreement, but if you do, both you and your employer are bound to the terms by law.

You should always get independent advice before signing a settlement agreement. Not doing so could invalidate the terms. Use an employment solicitor or trade union representative for this.

To make sure your settlement agreement is valid, it should be:
  • Made in writing
  • Signed voluntarily
  • Focused on your specific dispute
  • Drawn up by a named, independent lawyer
  • Sets out the terms for you and your employer
  • States that it meets the laws of a settlement agreement

Why is a settlement agreement made?

Your employer may ask you to sign a settlement agreement for a number of reasons. Saving money and time, for instance, and preventing possible reputational damage.

As an example: if you’ve been discriminated at work and can easily prove it, the company you work for might choose to, instead of defending itself at a tribunal it knows it’ll lose. It’s far easier, cheaper, and quicker for the employer to settle.

But it’s not a one-way street. Agreements also mean you have a guaranteed outcome without the stress and worry of a lengthy tribunal process.

You may also see a settlement agreement when your employer doesn’t want to go through particular processes. So, rather than going through the redundancy process, for instance, they might make you an offer and terminate your contract more quickly.

When should a settlement agreement be made?

There are only two ways an employer can stop you taking your claim to an employment tribunal.
  • A COT3 agreement from ACAS
  • A settlement agreement
  • A COT3 agreement from ACAS

When you intend to take your employer to an employment tribunal, you must always tell ACAS. Before permitting you to go to tribunal, the impartial body will offer you and your employer a kind of mediation session called early conciliation.

Early conciliation lets both of you discuss the issue with an independent third-party. At the end, you’ll hopefully receive a COT3 agreement. This form lays out the agreed terms that you must both abide by.

Think of a COT3 as a formal settlement agreement. If an agreement can’t be reached, you’ll receive a certificate letting you continue your claim at a tribunal.
  • A settlement agreement

Your employer doesn’t have to wait for early conciliation to draw up their own settlement agreement.

They might make an offer at any point before an employment tribunal takes place. It’s not uncommon for employees to meet with the employer’s representative to agree a settlement just minutes before the tribunal hearing.

If this happens, don’t feel pressured into signing until the agreement can be properly reviewed.  

Should I accept a settlement agreement?

You should always think carefully about accepting a settlement.

At this stage, you should already have an employment solicitor on hand to advise you. It’s not a requirement for making a claim against your employer, but it will make the tribunal process easier and stop your employer from taking advantage of you.

Your solicitor will help make sure the terms are fair and reasonable, and they’ll check you wouldn’t receive more (or much more) by continuing with your claim at tribunal.

Together, you’ll weigh up what’s on offer against the strength of your own case and how much you think you could win at a tribunal. If your solicitor expresses doubts, they’re also able to negotiate a better settlement agreement on your behalf.

Remember, if you’re in receipt of certain state benefits, like Universal Credit, you won’t need to pay back any sum in a settlement agreement. But you will need to pay back the DWP if you’re awarded compensation through a tribunal. So, even if you might win your case, you could end up getting more by accepting your employer’s offer.

If either you or your employer breaks the agreement – for example, they don’t pay you or you attempt to take the employer to a tribunal over this specific dispute – it’s illegal and the offender will be found in breach of contract.

The choice to accept or reject a settlement agreement is entirely up to you.

The Law Superstore helps you compare and connect with employment solicitors who can guide you through the settlement agreement to make sure you get what you deserve.

Terms Included in a Settlement Agreement

A settlement agreement is a legally binding document between an employer and an employee, typically used to resolve disputes or to agree on the terms of an employment termination. The terms included in a settlement agreement can vary, but commonly encompass the following:

  1. Compensation Details: This includes the amount of any settlement payment offered by the employer. It may cover redundancy pay, unpaid wages, bonuses, or compensation for loss of employment.

  2. Waiver of Claims: The employee agrees not to pursue any legal claims against the employer, such as unfair dismissal or discrimination claims.

  3. Confidentiality Clause: Both parties often agree to keep the terms of the agreement, the circumstances leading to it, and any discussions confidential.

  4. Reference Clause: The agreement may specify the provision of a reference by the employer, often detailing what will be included in it.

  5. Return of Company Property: Obligations for the employee to return any company property in their possession.

  6. Post-Termination Restrictions: This may include clauses related to non-competition, non-solicitation, or non-disparagement.

  7. Tax Indemnity: Terms regarding the handling of any tax liabilities that may arise from the payments made under the agreement.

  8. Legal Fees: Often, the agreement will state who is responsible for legal fees incurred during the negotiation process.

What to Ask for in a Settlement Agreement

When negotiating a settlement agreement, consider the following to ensure your interests are adequately protected:

  1. Fair Compensation: Ensure the financial settlement reflects your entitlements, including any unpaid salary, bonuses, or holiday pay, and compensates for the loss of employment.

  2. Reference: Request a positive or at least a neutral reference from your employer, and agree on the wording.

  3. Waiver of Claims: Understand the implications of waiving your rights to any legal claims. Ensure you are comfortable with what you are agreeing to.

  4. Confidentiality Terms: Clarify what you can and cannot disclose. Sometimes, you may want to negotiate terms that allow you to discuss the agreement with immediate family or professional advisors.

  5. Tax Implications: Seek clarity on how the payments will be taxed and who will bear any potential tax liabilities.

  6. Legal Costs: Negotiate for the employer to cover your legal costs incurred in seeking advice on the agreement.

  7. Outplacement Support: In cases of redundancy, you might ask for services that assist with finding new employment, such as career coaching or job search support.

  8. Health Insurance and Benefits: If applicable, negotiate the continuation of certain benefits, like health insurance, for a specified period after termination.

  9. Time to Consider: Request adequate time to review and consider the agreement before signing, typically at least 10 days.

  10. Restrictive Covenants: If the agreement includes post-termination restrictions, ensure they are reasonable and do not unduly limit your future employment opportunities.

Remember, it's crucial to seek independent legal advice when negotiating a settlement agreement to ensure your rights and interests are fully protected.