Not every employer will offer every employee a settlement agreement on the termination of their employment. Does this matter? What are the benefits of a settlement agreement for employers and employees? And, do you have to use a lawyer (and if so, who pays for it)?

What is a settlement agreement?

A settlement agreement (previously known as a compromise agreement) is a document which meets conditions laid down by law and enables an individual to “sign away” their rights to bring various legal claims in the employment tribunal. Generally a settlement agreement will include a payment from the employer in consideration of the employee giving up their statutory employment rights.

Does my employer have to give me a settlement agreement if it is dismissing me?

No, settlement agreements are not compulsory and there is no obligation on an employer to provide one in the event it dismisses an employee (for whatever reason).

What are the advantages for the employer of using a settlement agreement?

For the employer, asking an employee to sign a settlement agreement provides certainty that there will be a “clean break” between the parties and that they will not face the risk of  litigation from the individual. This can obviously be very valuable for a business. For example, if an employer wants to save itself the trouble of going through a lengthy disciplinary process, it risks a claim of unfair dismissal if it simply terminates employment without going through the proper procedure. By asking the employee to sign a settlement agreement whereby they sign away their right to bring a claim of unfair dismissal, the litigation risk is removed. Employers are likely to want this level of certainty where they are aware there is a significant risk of a claim, perhaps because they have failed to follow the correct procedure.

What are the advantages for the employee of using a settlement agreement?

It can be helpful to have everything set out clearly in one place and a settlement agreement is a legally enforceable document so, if the employer does not deliver its side of the bargain enforcement action can be taken.

Why do I need to see a lawyer if  my employer has given me a settlement agreement?

One of the legal conditions for a valid settlement agreement is that the individual has received advice from a qualified, independent lawyer as to the effect of signing the agreement. The lawyer must sign the agreement as well to confirm they have given such advice. Without the employee taking legal advice the agreement will not be valid so an employer will insist that you do so.

There is also an advantage to the individual in seeing a lawyer as, in the course of giving advice the lawyer will need to assess the strength of any potential claims you may have against your employer. This then enables an informed appraisal of any termination package which the employer is offering. Often a lawyer can then negotiate with the employer on your behalf and, hopefully, improve the package being offered.

Does the employer have to pay for my legal advice?

No, there is no legal requirement for it to do so. However, it is conventional for an employer to include a contribution towards legal fees as part of the termination package. The amount given by employers ranges from £350 to the thousands but, often it will not cover all the legal costs that end up being incurred (especially if the dismissal is contentious). This is all up for negotiation as part of the exit package and something your lawyer can address with your employer on your behalf!

What is the position if my employer is terminating my employment without a settlement agreement?

There are various reasons why an employer may seek to dismiss an employee without offering them a settlement agreement. Perhaps it believes the dismissal is amicable and it has done everything right so there is no risk of litigation, perhaps it does not wish to pay for legal advice or, it does not want you to have to talk to a lawyer and be informed about your legal rights. As the effect of the settlement agreement is largely positive to for the employer, by not getting you to sign a settlement agreement it is leaving itself vulnerable to possible claims because you will still be able to bring these in the employment tribunal or ordinary courts.

Do I still need to see a lawyer if my employer doesn’t give me a settlement agreement?

Absolutely! It is perhaps even more important for you to get advice about what your entitlements are and whether you  have any potential claims against your employer – not just in respect of your dismissal but also in respect of your broader employment. If your employer becomes aware that you have taken legal advice it may then be more inclined to offer you a settlement agreement (with termination package) in order to avert possible litigation.

How can we help you?

Worried about your employment, going through a redundancy exercise or about to be dismissed? , talk to our employment law specialists today. We’ll help you figure out the best way forward for you.


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Updates: For employers: Settlement agreements | For employees: Exit package |

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