What is a Settlement Agreement?

A UK settlement agreement (previously called a compromise agreement) is a legally binding contract between an employer and an employee, used to terminate employment or settle a workplace dispute on mutually agreed terms. In exchange for compensation – sometimes called a termination payment –  the employee agrees to waive their right to pursue certain claims against the employer, such as unfair dismissal or discrimination.  It is a requirement or a legally binding Settlement Agreement to take legal advice.  We would be happy to help.  You can email Diane Massey direct at dianemassey@dsmlegal.co.uk or call 01925 937070.  We will respond the same day.

When are settlement agreements used?

• Redundancy: As an alternative to going through a full redundancy consultation process.
• Disciplinary or performance issues: An employer may propose an agreement to resolve a dispute quickly rather than going through a potentially long and damaging disciplinary process which may end in termination anyway.
• Breakdown of relationship: For situations where the employment relationship has become unworkable a clean break can be the best solution.
• Discrimination claims: If an employee has raised a grievance or complaint about discrimination, a settlement can be used to resolve the matter and avoid a tribunal claim.

Is a settlement agreement legally binding?

• In writing: The agreement must be a written document.
• Relates to a specific complaint: The agreement must clearly specify the particular claims the employee is waiving.
• Independent legal advice: The employee must receive independent legal advice from a qualified solicitor or trade union representative on the terms and effects of the agreement.
• Professional indemnity insurance: The independent legal adviser must be insured.
• Identifies the adviser: The agreement must name the independent adviser.
• Satisfies statutory conditions: The agreement must explicitly state that all legal conditions for a settlement agreement have been satisfied.

How much does it cost to take legal advice for a settlement agreement?

Costs average £500.00 + VAT for standard advice, and where the terms of the settlement agreement are agreed between the parties.  Your employer will usually include a clause in the settlement agreement to cover the cost of standard advice as it is in their interest to ensure the agreement is legally binding.

As stated above Settlement Agreement are very common in redundancy cases and often an employer will offer an enhanced package over and above the statutory redundancy entitlement.  You can check what your statutory redundancy payment is here. 

What is included in a settlement agreement?

• Compensation: A termination or ex-gratia payment (compensation for loss of employment) is paid tax free up to a maximum of £30,000.00.
• Contractual benefits: Salary, outstanding holiday or notice pay are the most common contractual entitlements although sometimes additional benefits, such as outplacement support, can be offered.  All contractual benefits are taxed and subject to national insurance deductions. 
• Reference: An agreed reference that the employer will provide to future prospective employers.  It is common nowadays for employers to offer only a factual reference detailing the date employment commenced, date of termination and job description, however it is always worth asking for a bespoke reference. 
• Confidentiality: There will be clauses in the settlement agreement preventing you from discussing the terms of the settlement, the reasons for termination of employment and the circumstances leading up to it.  However, you cannot be precluded from making a protected disclosure (whistleblowing) or reporting a criminal offence.  There is usually a clause in a Settlement Agreement that will permit you to tell limited categories of people such as your immediate family provided they agree to keep it confidential or the Inland Revenue for example.  
• Non-derogatory comments: A mutual clause preventing both parties from making disparaging remarks about the other is standard in settlement agreements.
• Post-termination restrictions: Limits on what you can do after leaving, such as restrictions on working for a competitor or soliciting clients.  These clauses often reflect what is already contained in your contract of employment. 
• Waiver of claims: The list of all specific claims you are agreeing to waive, which must be clearly and specifically identified in the agreement.  They will usually include unfair dismissal, discrimination and whistleblowing. 
• Exclusions: Most settlement agreements will exclude certain claims, in other words your right to bring certain claims, such as a claim to enforce the agreement if your employer breaches it, certain injury claims and accrued pension entitlements.

What happens if I don’t sign the Settlement Agreement?

You cannot be forced to sign a Settlement Agreement but if you decide not to do so your employer may continue with their internal processes, such as redundancy, disciplinary or institute a performance improvement plan.  In some circumstances, eg misconduct, your employer may decide to dismiss you.  However if they do not follow the correct procedure or their treatment of you is unfair you may be able to bring a claim in the employment tribunal.

What is a fair settlement? 

• Review the compensation: Assess whether the financial package, including ex-gratia payments, reflects your potential losses. 
• Consider non-financial terms:  A good reference is often a key aspect of a settlement agreement, but you can also negotiate things like an announcement about your departure and outplacement support.
• Protect your future: Ensure any post-termination restrictions are reasonable and won’t hinder your future career.  Check them against your contract of employment. 
• Communication: Your employer is looking for a clean break. It is important to be clear in your requests, highlighting your potential legal claims to show you are serious about negotiating. However, you should be realistic about what can be achieved as it may be that you do not have a strong case, and sometimes it is not possible to know the strength of your case in the early stages.  Other factors, such as the cost of pursuing a claim in the employment tribunal are important considerations.