Understanding Settlement Agreements – What every employee needs to know

At this time of year, many employers will be reviewing their annual budgets for the next financial year.  If staffing cuts are needed, the affected employees will generally be offered a Settlement Agreement making this a busy time of year for our employment team.

In this article we explain what a Settlement Agreement is and what you need to know if your employer asks you to sign one.

A Settlement Agreement is a binding contract which sets out the terms of settlement reached between you and your employer at the termination of your employment.  It is a useful tool for both parties as you know exactly where you stand financially and legally.  It can be used whether the termination of employment is amicable (for example voluntary redundancy) or not (for example a dismissal) as long as both parties agree to the terms.

A Settlement Agreement will record all of the payments that your employer will pay you, including final salary payments, holiday pay, notice pay and any compensation for loss of employment such as redundancy pay and ex-gratia payments.  It will also say when they are to be paid.  In many cases it will include agreed wording for future job references too.  In return, you waive your right to bring legal claims against your employer, such as claims for unfair dismissal.

Being presented with a Settlement Agreement by your employer can be a stressful experience, especially when it’s completely unexpected.  You will need to decide in a relatively short timeframe whether you should accept what has been offered or not.

Fortunately, Settlement Agreements are not legally binding unless you have taken independent legal advice from a solicitor or an appropriately qualified person.  The job of the solicitor is to explain the agreement in full, so you know what rights you are signing away in return for the financial payments.  The solicitor also has to sign the agreement to say that they have given you this advice.

The amount you should be offered in a Settlement Agreement will depend on many things, and a good solicitor will run through these with you to ensure you are being properly compensated:

1. How long have you worked for your employer?  To qualify for redundancy compensation, you will need to have a minimum of 2 years’ service.
2. What is your notice period?  This will determine your notice pay.
3. Do you have a potential Employment Tribunal claim?  For example, have you raised a grievance or do you have any employment issues outstanding?  If, for example you have just told your employer you are pregnant and are presented with a Settlement Agreement the next day, you are likely to have a discrimination claim.  How much would this claim or any other be worth?
4. How long will it take you to find another job?  One of the key aims of Settlement Agreements is to give you a financial cushion until you find another position.  You should be realistic when thinking about this.

When you are choosing a solicitor to advise you on your Settlement Agreement it is very important to choose an employment law specialist.  There are several reasons for this:

1. You may have a genuine Employment Tribunal claim and this should be identified and explained to you so that you can decide whether to sign the Settlement Agreement.  Remember – once you have signed, you lose the right to bring a claim.
2. You may be entitled to more than your employer is offering – a specialist will be able to spot this and negotiate with your employer on your behalf to get the best deal.
3. The Settlement Agreement may not be tax efficient – for example termination payments up to £30,000 are normally tax free, but payments in lieu of notice are not.  An employment law specialist will advise on the best way for payments to be made.
4. Your employer will usually offer a fixed amount towards your legal costs as part of the Settlement Agreement.  If you are happy with the agreement and there is no negotiation needed this will probably cover all of your legal costs.  If negotiation is needed, an experienced solicitor will ask the employer to increase their contribution and often they will agree.
5. Your employer may have had what is called a “protected conversation” with you before offering you the Settlement Agreement.  It’s possible that you may not be able to use discussions during this conversation for future bargaining purposes or in an Employment Tribunal claim.  This is a complex area needing specialist advice.

If your employer has asked you to sign a Settlement Agreement then our expert employment law solicitors are here to help.  Contact Backhouse Solicitors today to book an appointment with one of our friendly team who will explain the agreement to you in plain English.  If you aren’t being offered what you should be then they will negotiate to get the best deal from your employer.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.