Settlement Agreements – some frequently asked questions

21 April 2021

Some employers offer a settlement agreement to employees when they are leaving their job and there has been, or could be some kind of dispute. For example, there’s been a performance issue at work and your employer hasn’t followed disciplinary procedures or you‘ve raised a grievance at work and it hasn’t been resolved. Some employers will ask you to sign a settlement agreement as part of a redundancy process to protect them from the risk of you challenging their decision to make you redundant.

Your employer cannot ask you or force you to waive your employment rights unless you enter into a Settlement agreement. Any request will be void, even if it is in writing, unless there is a valid agreement in place and you’ve had legal advice on it. You should be permitted to choose your own solicitor who can give you impartial advice and not be pressured to use a solicitor ‘recommended’ by your employer.

Settlement agreements usually include a financial incentive in return for you signing away your rights and your employer will normally pay for you to receive legal advice.

Payments, such as holiday pay or notice pay, made under settlement agreements are subject to normal deductions for tax and national insurance, but often, as an incentive to sign, your employer will offer a compensation or ‘ex gratia’ payment and this is paid without deductions for tax and NI free (up to £30,000). This includes redundancy payments which are also tax free. Depending on the offer, it may be a good enough incentive to end your employment relationship and you are willing to sign on the terms offered. However, you are not obliged to accept the offer if its not good enough and you would prefer to negotiate better terms or reject the offer, leaving you free to pursue a claim. We can help you decide if the offer is a good offer or if there is scope to improve on it.

What is the effect of signing a Settlement Agreement?

A settlement agreement is a strong legal document. Once you sign, you are waiving your rights to bring a claim against your employer, which is why the law stipulates that you must have independent legal advice. If you sign, not only to you waive your right to bring an employment tribunal claim but any other claims to do with your employment in any other courts such as for a breach of contract or deduction of wages. Importantly, it will also waive your right to bring claims that you may not even be contemplating or aware of at the time.

Is there anything that can’t be waived?

Your employer cannot waive your right to enforce the settlement agreement, so if they don’t pay what they promise you can challenge them. Also, accrued pension rights are preserved and excluded from any settlement. Finally, your employer can ask you waive claims for personal injury that you are aware of, but they cannot ask you to waive the right to claim for personal injury claims that have not yet arisen and might happen in the future. We would expect to see clauses in any agreement setting out these exclusions.

How much will it cost?

Most employers will contribute towards to the costs of seeking legal advice and in most cases we will carry you the work for you for that contribution. If the contribution does not cover your costs we will negotiate with your employer to increase their contribution so that you don’t have to pay. Ultimately, if you do not sign the agreement and decide to issue proceedings against your employer you will pay for this advice.
Employers have to give you enough time to get legal advice, but I will always endeavour to arrange a meeting quickly to ensure there are no delays. We will arrange a meeting (either in person or via zoom) which should take no more than an hour. In the majority of cases the agreement can be signed during our meeting but, if there are minor changes that need to be made, I will contact your employer on your behalf and ask for any amendments. If you wish to substantially negotiate or challenge the agreement I will give you a quote for further dealings (as this won’t be covered by your employer).
Only when you are happy with the terms of the agreement should you sign it. At this point I will also sign a certificate to confirm you have received legal advice and ensure the agreement is valid.

I would need to see a copy of your employment contract and any other relevant correspondence that relates to your employment. In particular, if there is a dispute I would like to discuss this with you in detail and you should provide any relevant information you may have such as letters or emails between you and your employer.

If you have any questions about Settlement Agreements or have been presented with one and need independent advice please contact me on: [email protected] or 01273 447065.

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