Advice & Guidance On Settlement Agreements For Employees
If your employer wants to part ways with you on mutually agreed terms, they may propose a settlement agreement. Should you agree to a settlement agreement, you will receive a severance payment in exchange for waiving your right to pursue a claim against your employer via court proceedings or Employment Tribunal.
What Is A Settlement Agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding agreement between you and your employer. Your employer will provide you with a severance payment or ‘exit package’ to settle any possible claims you might make against them in a tribunal or at court.
Typically, settlement agreement documents will also set out terms whereby your employment contract is terminated. However, in rarer cases, settlement agreements can be used to resolve internal disputes that do not result in your departure from the business. Examples of these circumstances may include ongoing disagreements about holiday pay or sick pay. Without terminating your contract of employment, your employer can offer you enhanced payment through a settlement agreement to prevent you from going to court about these claims.
Why Might Your Employer Propose A Settlement Agreement?
There are a wide range of circumstances in which your employer may propose a settlement agreement and wish to mutually agree on severance terms with you. Most commonly, a settlement agreement can be proposed if you are involved in a workplace dispute or have expressed that you wish to make a claim against your employer and they deem that the matter cannot be resolved internally. A settlement agreement may also be used in cases where your employer wishes to make you redundant but does not wish to undertake a complete restructuring process.
Your employer benefits from a settlement agreement as they save time and expense on Employment Tribunals and hearings and are provided with a confidential and legally binding agreement that you cannot make a claim against them in the future. As the employee, you benefit from the agreement through the financial terms of the severance package and have the reassurance that the terms and details of your departure will remain confidential.
What Is Included In A Settlement Agreement?
All settlement agreements will differ. What your employer includes is largely dependent on the nature of the agreement and the reason for its creation. However, the settlement agreement issued to you by your employer will typically include the following:
Contract Termination
Most settlement agreements will be presented alongside the termination of employment. Your employer will provide you with a date that specifies when your contract of employment will end.
Severance Payment Details
By proposing a settlement agreement, your employer is asking you to waive your right to make claims against them in exchange for a severance payment. The settlement agreement will include details of the amount they are offering, as well as any outstanding salary, holiday entitlement, bonuses and commission that you are owed.
A full breakdown of the type of payments that will be made to you should be included and the settlement agreement should also specify whether the severance payment will be subject to tax. If the termination payment is less than £30,000, it should be tax-free. If you are offered more than £30,000 then any balance over £30,000 will be subject to income tax at the appropriate rate. HMRC may review the payments made and, depending on the terms of the settlement agreement, you may be required to reimburse your employer for any sums paid to HMRC should they challenge the payments.
The strength of your possible claim against your employer will have been considered by their solicitor when they draft up the agreement. However, you may disagree with the severance package proposed and our team of employment solicitors can help you negotiate a different payment if suitable. Your solicitor will consider your unique circumstances as well as the strengths and weaknesses of your possible claim, comparing this to the value offered by your employer.
Proposed Post-Agreement Terms
All settlement agreements will also provide details of both you and your employer’s legal obligations post-agreement. In most cases, this will include a confidentiality clause that ensures that neither party discusses the terms of the agreement. Your employer may also wish to include other post-termination restrictions such as a non-derogatory clause which prevents both of you from speaking badly about each other.
Employee Agreement
The settlement document must also include a clear clause that specifies that you agree to the terms laid out. If your employer wishes to terminate your employment contract, this clause will confirm that you are aware of and agree with the termination.
How Will My Employer Offer A Settlement Agreement?
Your employer must follow the Acas Code of Practice if they wish to offer you a settlement agreement. In many cases, they may wish to arrange a meeting with you to discuss the idea of a settlement agreement but they can also proceed on a ‘writing only’ basis. Whichever method is chosen, they should explain why they are proposing the agreement and offer alternative methods of resolution such as performance management or disciplinary proceedings. You are welcome to refuse the offer of a settlement agreement and can also refuse any alternatives proposed.
The letter issued to you by your employer must follow the rules laid out under S111A of the Employment Rights Act 1996. It should also provide a cut-off date by which you must accept or decline the final settlement offer and this date must be no less than 10 days later as per the Acas Code of Practice.
Do I Have To Accept The Terms Of A Settlement Agreement?
Settlement agreements are voluntary and you do not have to accept the terms of a settlement agreement. At no point are you legally obliged to sign the agreement and you must not be pressurised by your employer to proceed.
You may wish to turn down a settlement agreement if you would prefer to deal with your claim in a different way or if you believe that the terms of the agreement and severance payment are insufficient. At this point, your nominated solicitor may attempt to negotiate with your employer to achieve more favourable terms.
If you do reject the settlement agreement, your employer is not allowed to threaten you with dismissal. The threat of dismissal following a rejected settlement agreement constitutes improper conduct and can be used as evidence for any claims that you might wish to take to an Employment Tribunal or court.
Can I Request A Settlement Agreement From My Employer?
In most circumstances, the settlement agreement will be offered from employer to employee. However, it is possible to request a settlement agreement from your employer if you think it is suitable. Doing so may be an appropriate course of action for you if you feel like you are being treated unfairly by your employer or deem them to be setting unrealistic expectations of you. These scenarios can constitute a claim against your employer, but it may be more appropriate to avoid making a claim and settle the matter on mutually agreed terms via a settlement agreement instead.
Will My Employer Provide Me With A Reference?
If you are employed in the financial services sector, your employer is obliged to provide you with a ‘true, accurate and fair’ reference following a settlement agreement.
In all other sectors, employers are under no legal obligation to provide the employee with a reference but most will choose to specify this and attach it in the terms of the agreement. References provided will usually be brief and offer a disclaimer to your future employers. However, they may wish to provide any additional factual details or follow other standard internal reference policies.
As an employee, you are entitled to ask for a more detailed reference. Do note that your employer is under no obligation to provide you with this even if you do ask.
Settlement Agreement Legal Advice Requirements & Costs
Settlement agreements are complex and each case has its own unique requirements. When you enter into such an agreement, you waive your right to bring an employment claim. For this to be legally binding, section 203(3) of the Employment Rights Act 1996 requires that you obtain ‘advice from a relevant independent adviser’ on the ‘terms and effects of the proposed agreement’. As per section 203(3), the independent adviser consulted must be named in the final settlement agreement and have a current contract of insurance that covers the risk of any claim that you may make against them in respect of the advice given.
Because it is a legal requirement that you receive legal advice on the ‘terms and effects’ of the settlement agreement, your employer will usually be expected to cover or make a contribution towards your legal costs as well as their own. If you do not enter into the agreement then the contribution made by your employer will be withdrawn and you will be liable for the costs of the legal advice received. Remember, the settlement agreement will not be legally binding if you do not receive independent legal advice.
How Can GA Solicitors Help Employees With Settlement Agreements?
Our expert employment team has years of experience providing employees with comprehensive and transparent advice concerning the implications of settlement agreements. Your nominated solicitor will work with you to ensure you understand your obligations under the agreement and can negotiate the severance term or other terms based on the viability of your possible claim. Do note that legal fees may be higher than your employer’s contribution if you wish to negotiate the settlement agreement.
When you receive settlement agreement advice from GA Solicitors, you have the option to meet with your solicitor face-to-face at our Plymouth office. Alternatively, we can arrange a telephone or video call to discuss the contents and terms of the settlement agreement.
When it comes to signing the agreement, it is no longer customary or a requirement for you to physically print and sign a copy of the settlement agreement. Electronic signatures in acceptable forms such as Abobe Fill and Sign and Docusign are widely accepted.
Our solicitors can work quickly, so don’t hesitate to call our employment team on 01752 203500 to discuss your situation and receive trustworthy advice about a settlement agreement. Alternatively, you can email enquiries@GAsolicitors.com.
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