Try to resist feeling pressured into signing a settlement agreement. It is important to take control of the negotiation.

Thoroughly read the agreement

The first thing to remember is that this happens frequently. Nothing is binding until the agreement has been agreed and signed by you.

Settlement agreements are long and complicated documents in which you will be signing away important legal rights. Take your time: get the best advice and make sure you are making the right decision. It is up to you whether to sign or not.

What is a settlement agreement?

A settlement agreement is a written contract between employer and employee. It is designed to prevent employees from bringing claims against their company or employer, in return for a cash payment.

From an employer’s perspective, the purpose of a settlement agreement is to provide a ‘clean break’ from an employee without the risk of future legal claims being made against them. In return, the employee is given some sort of enhanced payment.

Why has your employer asked you to sign a settlement agreement?

Settlement agreements may also be offered in any number of situations, such as during performance improvement programmes, a disciplinary process, or a tribunal claim.

The offer may arise when the employer feels there may be a risk of a legal claim being brought against them, but it may also be that they want a clean break in return for an enhanced redundancy payment.

A final settlement may be offered at any time during the redundancy process. However, provided the redundancy is legitimate, it will most likely be given to an employee once the process has been concluded.

person clearing out their office desk

Evaluating your position for a fair financial outcome

By signing a settlement agreement, you are telling your employer that you are happy to leave the organisation. The alternative would be for your employer to dismiss you.

Assess the situation and decide whether the employer could dismiss you fairly in any case. If they could, you will be in a weaker bargaining position. If they could not, your position will be stronger.

For example, if you are being made redundant and a legitimate redundancy process has already been followed, you may find yourself in a weaker position to negotiate. Depending on how much you have been offered, you may feel more confident to push for better financial terms if it appears that your proposed redundancy is unfair. This could be because:

  • you have been unfairly selected,
  • a proper consultation has not been followed, or
  • there appears to be discrimination.

You may also feel at a disadvantage if disciplinary proceedings are ongoing, with the potential to end in dismissal for gross misconduct. Under the circumstances, it may be advisable to enter into the settlement agreement first. This could provide the best chance for a neutral reference.

On the other hand, where a performance improvement plan is in place, an employer can only dismiss after fair opportunity has been given to achieve reasonable targets. This could take some time and may not be achievable. In that situation you will likely feel confident about asking for proper compensation.

Other financial considerations when entering an agreement

There will usually be an amount in the settlement for a payment in lieu (instead of notice). You should ensure this includes the full notice period and all benefits (such as pension contribution, private healthcare, etc). Untaken annual leave will also be an important element of compensation.

The tax treatment of any payments is also important because this affects the actual value of the deal to you. Only true ex-gratia and non-contractual payments will be tax-free up to £30,000. Payments such as those made in lieu of notice or untaken holiday will invariably be taxable.

checking settlement payment

Deciding on a strategy

Once the financial side of the offer has been considered, try to negotiate this upwards, or reject the deal altogether. You can then turn your attention to the other terms of the agreement, of which there will be many.

Contacting an employment law specialist

Because you will be signing away important employment rights, a certificate signed by a solicitor or other legal adviser is always necessary for a settlement agreement to be concluded. This is a legal requirement, and the certificate is part of the legal format. The agreement may need two certificates if the final working day is some way off.

There will usually be an amount of money in the agreement to cover your legal costs. It is usually a good idea to contact a legal advisor sooner rather than later.

Prudence and attention to detail are key. Remember: take your time and get it right.

If you need help navigating this important decision, get in touch. With Springhouse Solicitors, you will have access to a wealth of employment law expertise. Contact us today to find out about our no-cost (to you) settlement agreement service.

Published in…

Updates: For employers: Settlement agreements |

Share this update on

Contact Us

  • Drop files here or