As an employee you may find yourself presented with a settlement agreement. In this blog we answer some frequently asked questions and we also set out some practical guidance on what to do if you are presented with a settlement agreement.

What is a settlement agreement?

A settlement agreement is a legally binding agreement between you and your employer. It is common for a settlement agreement to offer you a compensatory payment, in exchange for you waiving or settling potential legal claims against your employer.

The purpose of the agreement is to record the full settlement terms. It will include details of the financial payments you will receive and a list of the claims that you are waiving. The agreement will also include other important and practical terms which your solicitor will talk you through. It is very likely that the agreement will include a confidentiality clause. This means that the agreement will be confidential and you should not discuss the terms or existence of it with anyone else.

Why do companies use settlement agreements?

A settlement agreement can provide a clean break for both you and your employer. It can offer a quick alternative to the time and cost associated with a formal process, for instance, a redundancy or disciplinary procedure. The benefit to your employer is that you are agreeing to waive your employment law claims and the terms of the settlement will be confidential.

What is the benefit to you?

Terms that are negotiated through settlement agreements can often represent a better financial outcome from that which you may achieve through issuing a case an employment tribunal. This is partially due to the uncertainty and ‘litigation risk’ of issuing a claim at a tribunal. However, it can also provide you with control over specific terms, such as a reference or an agreed announcement. These are terms that can be extremely valuable. In addition, you can achieve a quick resolution and avoid the financial and emotional burden of proceeding with a claim at an employment tribunal.

How do you know if it is a good settlement agreement and if you are being offered a fair deal?

The role of your solicitor is to explain the terms and effect of the settlement agreement. However, your solicitor will also be able to help advise you on the merits of any potential legal claims you may have. This could involve considering if you could have an unfair dismissal claim or any discrimination protection. This will help you to understand whether you are being offered a fair settlement package.

If you would like to negotiate on the financial package that you have been offered, your solicitor will be able to assist with this. This will involve weighing up the employment rights you are waiving against the benefit of the compensation you are being offered. You may also wish to negotiate the specific wording of certain clauses and we can assist with this.

Why do you need to speak to a solicitor about the settlement agreement?

A settlement agreement can only become legally binding once you have taken independent legal advice on the terms. This means that you are required to take a copy of the agreement to an employment law solicitor.

The meeting can be conducted remotely online, or in person. The solicitor will advise you on the terms of the proposed agreement and its effect. Your solicitor will explain what each clause means and can answer any questions that you have. Once the agreement is finalised, the solicitor will sign a certificate to confirm that they have given legal advice to you.

Do you have to pay for the cost of getting legal advice?

The agreement is very likely to include a contribution from your employer toward the cost of you getting legal advice on the terms of the agreement. The value of this contribution varies but it is commonly between £350-£500 plus VAT. The contribution can be higher depending on the circumstances. If you wish for your solicitor to negotiate on the financial package which is being offered or the terms of the agreement, you may exceed the legal fee contribution offered by your employer. Your solicitor can discuss this with you and your options, which may include seeking an increase to the legal fee contribution.

How long does the process take?

Generally speaking, settlement agreements can be concluded relatively quickly. If you are happy with the terms of the proposed agreement, your solicitor should be able to finalise the agreement within a few days. In some cases it can even be concluded on the same day. The timeframe will be dependent on what negotiations are required and how quickly your employer responds. Your solicitor will keep you updated on this.

If you have a specific deadline, your solicitor will do their best to accommodate this. It is helpful if you let them know the timescales at the start of the process so that they are fully aware.

Do you have to sign the settlement agreement and what happens if you refuse?

No. Settlement agreements are completely voluntary and the terms must be agreed by you and your employer. You should not sign the settlement agreement if you do not wish to do so.
If you do not sign the settlement agreement your employer will not pay you the compensation sum and, depending on the circumstances, they may look to commence a formal process with you.
As explained above, it is usual for your employer to pay a contribution towards your legal fees in obtaining advice. This contribution is normally conditional upon you signing the agreement. Therefore if you decide not to sign the agreement you will need to personally pay for any legal fees incurred in getting advice on the agreement.

When will the settlement compensation be paid?

Usually the sums are paid within 7 to 28 days of you signing the agreement, or in the next payroll. This can vary depending on your termination date or what has been agreed. The payment terms will be contained in the settlement agreement and your solicitor will be able to confirm this.

Will the compensation be subject to tax?

The company will deduct from the payments under the agreement all the income tax and employee National Insurance contributions (NICs) that it considers it is required to deduct by law. You will therefore receive a net payment, after such deductions have been made.

Under current tax legislation, up to £30,000 of genuine compensation can be paid on a tax-free basis in certain circumstances. This will depend on the specific circumstances and payments that are being offered to you.

Can a settlement agreement be withdrawn or cancelled?

The settlement agreement will not be legally binding until it has been signed by you and your employer. This means that, prior to you and your employer signing, it would be possible for either side to change their mind or withdraw from the process. Once the agreement is binding, it cannot then be cancelled or changed without the consent of both you and the company.

What happens if you breach the settlement agreement?

This would depend on the nature of the breach and the terms of the agreement itself. The agreement may contain wording about this and what could happen if you were to breach a key provision.
Sometimes the agreement will say that if you breach the agreement then any compensation payable under it will be repayable. You should be very careful to avoid breaching any terms of the agreement as this may result in legal and financial repercussions for you.

How to arrange an appointment with a solicitor at Paris Smith LLP

If you have been provided with a settlement agreement we would be very happy to advise you. We have a team of nine employment solicitors who advise employees on settlement agreements on a regular basis. Please contact us and we can explain the process and arrange an appointment at a convenient time. You can also find more details on our dedicated “Settlement Agreements” webpage.