A settlement agreement is a legally binding agreement under which you will usually receive a financial payment or other benefits in return for agreeing not to bring specified legal claims against your employer.
You do not have to accept the agreement immediately. Understanding what has been offered, what rights you are giving up and whether the terms are reasonable is important before you sign anything.
Why might your employer offer a settlement agreement?
Settlement agreements can be used in many different circumstances.
Your employer might make an offer where:
- Your role is being made redundant
- There are concerns about performance or capability
- A disciplinary or grievance process is ongoing
- The working relationship has broken down
- You are leaving a senior position
- Both sides want to resolve an existing workplace dispute
- An agreed exit may be preferable to continuing a formal process
A settlement agreement is voluntary. You are not required to accept simply because your employer has proposed one.
What should the settlement agreement include?
The agreement should explain the terms on which your employment will end and the payments or benefits you will receive.
Depending on your circumstances, this could include:
- Your termination date
- Salary owed to you
- Notice pay
- Accrued holiday pay
- Redundancy pay
- An additional compensation payment
- Bonus or commission arrangements
- Treatment of benefits or share schemes
- An agreed employment reference
- Confidentiality provisions
- Restrictive covenants
It should also identify the legal claims you are agreeing not to pursue.
This is one of the most important parts of the document, as signing a valid settlement agreement will normally prevent you from later bringing the claims covered by it.
Do you need legal advice before signing?
Yes. For a settlement agreement to validly waive relevant employment claims, you must receive advice from an appropriate independent adviser about the agreement and its effect on your ability to pursue those claims.
This will commonly be a solicitor specialising in employment law. The adviser must be independent of your employer and appropriately insured.
Employers will often offer a contribution towards the cost of obtaining this advice, although they are not generally required to do so. Offering a reasonable contribution is generally in the employer’s best interests as it ensures that the employee is able to obtain the necessary independent legal advice required to make the settlement agreement valid and binding.
Your solicitor can explain the agreement, identify potential claims and advise you on whether the proposed terms are reasonable.
How long should you have to consider the offer?
You should be given a reasonable amount of time to consider the proposed settlement agreement and obtain advice.
The Acas Code recommends, as a general rule, allowing at least 10 calendar days to consider the formal written terms and receive independent advice, unless both sides agree otherwise.
You should avoid feeling pressured into signing immediately.
If you need additional information or time to understand the offer, this can often be raised as part of the negotiation.
Can you negotiate a settlement agreement?
Yes. Settlement agreements are negotiated agreements, so you may be able to ask for changes before accepting. Note though that negotiations are often not covered in the employer’s fee contribution to legal fees, so you may need to cover fees for substantial negotiations yourself.
Negotiations could relate to:
- The amount of compensation
- Your termination date
- Notice arrangements
- Bonus or commission
- An employment reference
- Confidentiality wording
- Restrictive covenants
- How your departure is announced
- Legal fees
Whether you should negotiate will depend on the strength of your legal position, the circumstances surrounding your departure and the value of what has already been offered.
How much should you receive?
There is no standard settlement agreement payment.
The amount offered may depend on factors such as your salary, length of service, notice entitlement, the circumstances surrounding your employment and whether you may have valid legal claims.
It is important to distinguish between money you are already entitled to receive, such as salary, holiday pay or notice pay, and any additional compensation being offered for entering into the agreement.
A solicitor can help you assess the offer against the potential value and risks of pursuing another route.
Will your settlement agreement payment be taxed?
Different parts of a settlement payment can receive different tax treatment.
Payments such as salary, holiday pay, bonuses and payments relating to your notice period will generally be subject to Income Tax and National Insurance.
Some qualifying termination payments can potentially be paid free of Income Tax up to a combined £30,000, although the rules depend on what each payment represents.
Your settlement agreement should explain the intended tax treatment, but specialist tax advice may be appropriate where the package is complex.
What about confidentiality?
Settlement agreements often include confidentiality clauses.
These might restrict what you can say about the agreement, the amount you receive or confidential information belonging to your employer.
However, confidentiality clauses cannot lawfully prevent certain disclosures, including protected whistleblowing or reporting a crime to the police.
You should understand exactly what you can and cannot discuss before signing.
What happens if you reject the settlement agreement?
You are free to reject the offer.
What happens next depends on why the settlement agreement was proposed. Your employer might continue with a redundancy, disciplinary or performance management process, or the employment relationship may simply continue.
Rejecting a settlement offer does not automatically mean that you will be dismissed.
If you are unsure whether to accept, reject or negotiate, taking legal advice can help you understand both the offer and what may happen if no agreement is reached.
Getting advice on a settlement agreement
Settlement agreements can provide certainty and allow both sides to move forward, but signing one usually involves giving up important legal rights.
DTM Legal’s Employment & HR team advises employees and senior executives on settlement agreements, redundancy, employment exits, workplace disputes and restrictive covenants.
If your employer has offered you a settlement agreement, contact DTM Legal’s Employment & HR team for independent legal advice on the terms, your employment rights and whether the proposed package is appropriate.