Understanding settlement agreements: should you sign?

When you’re offered a settlement agreement at work, the big question is: should I sign it?

The basics of settlement agreements

A settlement agreement is a contract created 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’ll also lose your statutory redundancy pay. Some settlement agreements may also contain a confidentiality clause.

In most cases, the ‘X’ in your agreement will be some form of financial compensation, money due, plus a good reference from the company you work for so you can find another job. Companies tend to prefer settlement agreements because it’s quicker, easier, and cheaper to settle ‘out of court’ than defend themselves at a tribunal. For the same reason, they also use agreements to avoid lengthy processes, like redundancies.

Signing a settlement agreement means you’re guaranteed what’s included in the agreement – it becomes legally binding. But it also means that you can’t take legal action for the specific dispute or process the agreement addresses.
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, you don’t have to sign any settlement agreement. And if you do, it must be voluntary – your employer can’t pressure you to sign. 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 advisor. This is usually a solicitor or union representative. It’s the law.

Employment solicitors will assess what you’re being offered (and the legality of the agreement) and advise whether to take the deal.

You’ll usually be advised to accept a settlement agreement if:
  • It offers more, as much, or almost as much, as you’d potentially win at an employment tribunal
  • You’re unlikely to win a claim against your employer

Your solicitor will also be on the lookout for other breaches of law. Have you been discriminated against at work? Would this constitute unfair dismissal? If they turn up a separate legal issue, you could be awarded even more at a tribunal and a settlement agreement may jeopardise that. You may also have to pay tax on what – at first glance – seems like a very generous settlement.

Remember, though, if you choose to reject the settlement agreement, your employer can still dismiss you.

You can negotiate the agreement

If your solicitor tells you not to sign a settlement agreement, it doesn’t mean you’ll be rejecting it out of hand. Negotiations are an important part of the process. From the beginning of the process, you and your employer should be finding common ground in a document that works for all involved.

When you’re presented with a settlement agreement, you’re well within your rights to ask your employer to re-think what’s on offer. And your employer is also within their  rights to say no.

Assuming you both agree, though, settlement agreements can be negotiated alone or by your solicitor.
If you choose to do it yourself, you may be allowed to bring along a companion if, for example, your English isn’t very good or you have a disability. However, it’s usually best to let your legal representative get you a better deal if they believe one is possible.

If you fail to reach an agreement and make a claim at a tribunal, you won’t be allowed to talk about discussions that happened during the negotiation period.

You should sign when you’re ready

When you accept a settlement agreement, you should be fully confident that you’re getting the best possible offer. You should also be aware of what signing means and what you stand to lose and gain.

Because you need to get advice from a solicitor before a settlement agreement is legally binding, some companies will pay for you to speak to one. However, you don’t have to use the one they suggest and you’re free to find your own.

Just give us a few details and The Law Superstore can help you compare and connect with employment solicitors ready to make your settlement agreement a success.

Steve Clark

Steve creates helpful guides for The Law Superstore. He enjoys digging deep into new areas of the law, supporting partners, and translating legalese and jargon into plain English everyone can understand.

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