Settlement Agreements: A Comprehensive Guide

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.

What is a Settlement Agreement?

A settlement agreement is essentially a formal contract between an employer and an employee. It is often utilised to resolve disputes that have emerged in the workplace or to establish terms when an employment relationship is concluding.

This agreement usually encompasses financial compensation for the employee and might also cover other aspects like confidentiality clauses.

In exchange, the employee agrees not to initiate legal proceedings against the employer related to the dispute.

It is crucial for both parties to thoroughly comprehend and mutually consent to the terms prior to signing.

Is Opting for a Settlement Agreement Beneficial?

The decision to opt for a settlement agreement hinges on the unique circumstances of both the employee and employer.

For employees, it presents a quick resolution and a potential financial benefit, bypassing the need for protracted legal battles.

Employers gain by diminishing the likelihood of legal disputes and protecting their reputation. Nevertheless, evaluating the fairness of the terms of the agreement is essential.

Seeking legal advice is often advisable to ensure that your rights are sufficiently safeguarded and that the agreement serves your best interests.

What Amount Should Be Proposed in a Settlement Agreement?

The proposed amount in a settlement agreement is subject to variation, depending on factors such as the employee's salary, length of employment, reasons for termination, and any potential legal claims they may possess.

The amount should appropriately compensate for the loss of employment and any legal claims.

Employers often begin with a calculation based on the employee's weekly earnings and tenure, but it is common to engage in negotiations to arrive at a figure agreeable to both parties.

What Are the Legal Prerequisites for a Settlement Agreement?

For a settlement agreement to be legally binding, it must satisfy several conditions:

  • Documented in Writing: The agreement must be recorded in writing.
  • Specific Complaints or Proceedings: It should relate to specific complaints or legal proceedings.
  • Independent Legal Advice: The employee must receive independent legal counsel from a qualified professional, such as a solicitor, who should also affirm the agreement.
  • Identification of Legal Adviser: The legal adviser involved must be clearly identified.
  • Adviser's Professional Indemnity Insurance: The adviser should possess professional indemnity insurance to cover the risk of a claim by the employee concerning the advice provided.
  • Voluntary Agreement: Both parties should agree to the terms voluntarily, without coercion or undue pressure.
  • Clarity of Terms: The terms of the agreement should be clear and comprehensible.
  • Statutory Compliance: The agreement must explicitly state that it adheres to the statutory conditions governing settlement agreements.

Adhering to these requirements is vital for both parties to ensure the agreement's validity and enforceability.

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.