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Settlement Agreement

Settlement Agreement Solicitors

If you’ve received a settlement agreement from your employer, you’re likely in the process of deciding whether to accept it or negotiate the terms. This is an important step in the process that requires independent legal advice to make sure your rights and interests are protected.

We understand the importance of having access to expert legal advice during such significant moments in your career, and our network of experienced employment lawyers is here to provide you with the support and advice you need.

In certain cases, we can also facilitate payment for signing a settlement agreement through your employer, relieving the financial burden on your part.

To find out more, book a free case assessment with our Legal Assessment Team today. 

• What is a settlement agreement?

• Why do employers use settlement agreements?

• Do I have to say yes to a settlement agreement?

• Do you need a solicitor for a settlement agreement?

• How do you accept a settlement offer?

• What happens if I reject a settlement agreement?

• Settlement agreements vs compromise agreements

• Can the offer of a settlement agreement be used in court or tribunals?

• Can you be fired if you don't accept a settlement agreement?

• What payments are included in a settlement agreement?

• How much compensation should an employer offer in a settlement agreement?

• Do you pay tax on settlement agreement compensation?

• Does an employer have to give you a reference as part of a settlement agreement?

• What are post-termination covenants in a settlement agreement?

• Should settlement agreements be kept confidential?

• What happens if I breach the terms of a settlement agreement?

• How much does a settlement agreement cost?

What is a settlement agreement?

A settlement agreement is a legal contract employers use to agree on terms with employees to end their employment or resolve a dispute. 

Often, settlement agreements involve an employee receiving a financial settlement in exchange for giving up their right to make any employment claims against the employer in the future. 

These agreements were previously known as compromise agreements and are commonly used to avoid taking an employment matter to court or a tribunal, especially in redundancy situations. 

Why do employers use settlement agreements? 

Employers often use settlement agreements when they want to end an employment contract on mutually agreed terms. Offering a settlement agreement in these situations ensures a clean break without the risk of future employment claims. 

They are commonly used if an employer wants to avoid lengthy processes like performance reviews or redundancy processes. In these cases, offering the employee a settlement agreement provides a quicker route to the desired outcome and removes the risk of litigation. 

Employers may also use settlement agreements when a grievance is raised or discrimination concerns are brought to light. Again, the use of a settlement agreement can prevent potential claims for constructive dismissal or discrimination, which can be lengthy, expensive, and result in damage to the employer’s reputation.

Do I have to say yes to a settlement agreement? 

No, you do not have to agree to a settlement agreement. You have the right to carefully consider the terms in a reasonable time frame (Acas advises 10 days) and decide whether they are acceptable to you. 

After doing so, you can either negotiate better terms or reject the agreement outright if you feel it’s not fair or that you could get a better outcome through other means, like an Employment Tribunal claim.  

Do you need a solicitor for a settlement agreement?

Yes, for a settlement agreement to be legally valid, it must be reviewed and signed off by a solicitor, certified trade union, or advisor. 

A specialist settlement agreement solicitor provides legal advice on the strength of your claim and the potential compensation you might receive if you were to decline the settlement offer and take the matter to an Employment Tribunal. 

They’ll also help identify any discrimination you may not be aware of, such as disability discrimination, pregnancy discrimination, or age discrimination.

In such cases, you may have grounds for an unfair dismissal claim and could potentially receive more compensation or negotiate a more favourable settlement. 

How do you accept a settlement offer? 

If you decide to accept a settlement offer after checking the agreement and getting legal advice, you just need to sign it and send it back to your employer. Once you've signed, it's a done deal and you have to follow the agreed terms. 

Also, by signing, you're usually giving up your right to make any more legal claims against your employer. So, make sure you're okay with everything before you sign because you won't be able to ask for changes later on.

What happens if I reject a settlement agreement? 

If you say no to a settlement agreement, it means you're not agreeing to the terms your employer offered to settle the matter. You have the option to renegotiate or take legal action, like going to the Employment Tribunal. 

When you reject a settlement, you're not bound by its terms. You'll stay employed, and your employer might consider other ways to solve the issue, such as starting disciplinary proceedings.

Your solicitor can guide you on the consequences of rejecting asettlement, based on your case's specifics. It's important to carefully review the agreement with your solicitor before making a decision.

Settlement agreements vs compromise agreements - what’s the difference?

Before July 29th 2013, the official name for settlement agreements was compromise agreements. 

There’s not much difference between the two. However, with settlement agreements, discussions leading up to the offer can’t be used as evidence in a claim for unfair dismissal, unless the employer’s conduct during those discussions was inappropriate or unfair in some way. 

In other words, the fact that the employer proposed a settlement agreement usually can’t be used against them in an unfair dismissal claim. 

Are settlement agreements and redundancy the same thing? 

Settlement agreements and redundancy are related but different. 

When a company wants to lay off workers, they must fairly decide who will be let go. This process can be lengthy, especially for larger businesses. Sometimes, instead of going through this process, companies offer affected workers a redundancy settlement agreement. 

This agreement might include extra redundancy pay in exchange for giving up their right to the standard redundancy process. 

Employees don't have to accept these agreements. They can ask for the regular redundancy process to be followed instead. 

If you’ve been offered a redundancy settlement agreement, it’s important to seek independent legal advice. An expert employment solicitor can help you spot a bad redundancy settlement agreement or identify if a redundancy settlement agreement is favourable. 

Can the offer of a settlement agreement be used in court or tribunals?

Settlement agreement offers can be presented in an Employment Tribunal if you're facing potential discrimination based on protected characteristics or automatic unfair dismissal due to whistleblowing or safety concerns. 

Even if discussions are labelled as 'off the record' or 'protected conversations,' it's rare, under those circumstances, for them to be excluded from a tribunal.

These offers and discussions can also be revealed in legal proceedings if an employer behaves improperly. For instance, if they pressure, bully, or rush you into accepting the settlement offer without giving you adequate time to consider it.

Acas suggests a reasonable timeframe of around 10 days for employees to review and respond to a settlement offer. Any attempt to force an employee into quick acceptance is considered improper.

Can you be fired if you don’t accept a settlement agreement? 

No, if you reject a settlement agreement and your employer threatens to dismiss you before initiating any disciplinary action this behaviour would count as improper and could be disclosed in a Tribunal. 

If this happens to you, you might consider raising a formal grievance in this situation. Then, if your grievance isn’t addressed to your satisfaction, you could potentially resign and claim constructive dismissal. For more information on grievance hearings, take a look at our top tips for winning a grievance hearing as an employee. 

What payments are usually included in a settlement agreement?

Payment in a settlement agreement varies depending on the circumstances, but they usually involve: 

Compensation for loss of office (aka a termination payment) 

Compensation for loss of office is a sum of money paid to an employee upon termination of their employment contract. This payment usually features in a settlement agreement when someone loses their job because of redundancy, restructuring, or dismissal. 

Compensation for loss of office is intended to provide financial support to an employee while they are between jobs. Essentially, it compensates for the loss of income and employment benefits caused by the termination. The amount an employee might receive in compensation for loss of office varies depending on their length of service, terms of the employment contract, and any statutory or contractual entitlements. 

Compensation for loss of office may include redundancy pay, payment in lieu of notice (PILON), accrued holiday pay, bonuses, and ex-gratia payments.

Notice payment 

When an employer wants to end your employment, they have to give you a notice period, which is a set time before your employment officially ends. This is required by law. The notice period can't be shorter than what's stated in the law (statutory notice periods), but it can be longer if the employer chooses.

Sometimes, in a situation like a settlement agreement, the employer might prefer not to wait for the notice period to end. Instead, they offer a payment equal to what you would have earned during that time. This payment is called a notice payment or Payment in Lieu of Notice (PILON).

A PILON allows your job contract to end immediately without you having to work out your notice period. The amount of the payment is usually based on your salary and how long your notice period would have been, as stated in your employment contract or the law.

However, when you receive a notice payment as part of a settlement agreement, your employer might ask you to promise to cover any extra taxes they might have to pay because of the money they give you. It's important to understand tax indemnity in a settlement agreement, as you could be hit by a tax bill later on.

Bonuses and commissions 

If an employee typically gets bonuses or commissions based on their performance or sales, these payments might be part of a settlement agreement. 

How it works can vary. Sometimes, the employer agrees to pay the bonuses or commissions the employee would have earned if they hadn't been let go. Other times, they might offer a one-time payment instead to make up for the lost bonuses or commissions.

However, some settlement agreements might have rules or conditions that limit or cancel out the employee's right to these payments. That's why it's crucial to go through the agreement with a solicitor to understand what you're owed and if it's fair.

Pension payments

Typically, pension payments should keep going during an employee's notice period unless stated otherwise in their contract. 

In a settlement agreement, the handling of pension contributions, benefits, or entitlements when the employment ends is often discussed. This includes whether contributions will continue, transferring pension funds, or making adjustments to reflect the departure, like a tax-free lump sum payment into the pension. 

Your solicitor will explain how your pension might be impacted, particularly if you have a final salary pension.

How much compensation should an employer offer in a settlement agreement? 

Any sum offered in a settlement agreement should be fair and reasonable. Your solicitor can help you decide if the sum offered is both of these things based on your situation and what your employer is trying to achieve. They’ll also look at the strength of your case and weigh up how much you may get at an Employment Tribunal vs the settlement offer. 

If the offer is fair and reasonable, your solicitor will approve the agreement. However, if the offer falls short and you want to negotiate for a more favourable amount or outcome, your solicitor can advocate and negotiate on your behalf. They can also help you raise a grievance or appeal in cases of unfair dismissal, constructive dismissal, or discrimination. 

Do you pay tax on settlement agreement compensation?

Settlement agreement compensation is tax-free up to £30,000. Any amount after that will be subject to tax. Any other payments outside of the agreement, such as holiday pay and any further salary payments will be taxed as usual.

Does an employer have to give you a reference as part of a settlement agreement?

No, employers don't have to give references in settlement agreements, but it's a good idea to include this. 

Typically, the agreement will specify the type of reference the employer will provide. If it's not included, you should ask for it, along with assurances that the reference will be accurate. 

This is important to have because future employers often request references from your most recent job.

What are post-termination covenants in a settlement agreement? 

Post-termination covenants in a settlement agreement are rules that kick in after your job ends, usually mentioned in your contract. These can involve things like not working for a competitor (non-compete), not poaching clients (non-solicitation), keeping business secrets (non-disclosure), or staying away from work for a while with pay (garden leave). 

When deciding if the money offered in your settlement is fair, your solicitor looks at how crucial these rules are for your employer to safeguard their business. If they're really important, your employer might be willing to pay more to ensure they're followed. Your solicitor checks if the rules have been made tougher by your employer and if they still apply if your job ended due to a contract breach.

Should settlement agreements be kept confidential? 

Employers often add a confidentiality clause in settlement agreements to keep the details private and prevent negative comments about either party. 

This clause can be changed through negotiation. For instance, it might allow you to discuss the settlement with close family members, professional advisors, and prospective employers. 

What happens if I breach the terms of a settlement agreement? 

If one party doesn't stick to the terms of the settlement agreement, it's called a breach of contract. This could result in legal action. 

For instance, if you agree not to discuss the settlement with other employees, but If you do, you'd be breaking the agreement.

How much does a settlement agreement cost? 

The cost of a settlement agreement can vary depending on the complexity of the case and the solicitor’s fees. 

Employees need to know that employers usually cover the cost of a solicitor to review the settlement agreement. However, if additional services or negotiations are required, there may be extra charges that the employee is liable to pay. 

If the compensation offered by an employer is not enough to cover all the costs, you can: 

1. Ask your employer to increase their contribution; 

2. Check if you have legal expenses insurance through your home insurance; 

3. Pay the difference between your employer’s contribution and the total bill; 

4. Discuss other fee arrangements with your solicitor. 

Get expert help with settlement agreements 

Our skilled network of employment law experts is here to help you get the best settlement agreement possible. With Lawhive, you can quickly get legal advice online from top lawyers no matter where you are.

To start, just book a free case assessment with our Legal Assessment Team. We'll ask you some questions about your situation and then connect you with the right solicitor from our network. Whether you need a review, help with negotiating, or guidance in making a decision, we're here for you.