10 important things to consider when you’re asked to sign a Settlement Agreement

Being presented with a settlement agreement (formerly known as a compromise agreement) by your employer can be stressful.

The settlement agreement may come on the back of discussions and negotiations between employer and employee or it may be a bolt from the blue. The background to the proposal can vary though commonly it goes alongside a proposed termination of employment.

Money Settlement Agreement Employee Employer Compromise Agreement

The number of settlement agreements entered into every year is difficult to gauge as they are private agreements not publicly registered. Employment tribunal fees were introduced in 2013 and appear to have reduced significantly the number of claims being brought in employment tribunals. It may be that more employees are entering settlement agreements to avoid stressful and financially risky tribunal claims.

Settlement agreements – to sign or not to sign?

At first glance the document itself can appear daunting. The employee will almost always be asked to give up rights to bring claims against the employer.

Agreeing to do this will only be valid if independent advice is taken by the individual – usually from a solicitor. The formality and technicality of the document can be off-putting at first, but it is important not to sign up until you are fully informed.

10 things to consider

Below are 10 common issues which can arise for consideration when considering or negotiating a settlement agreement:

  1. Usually a payment will be made to the employee in exchange for giving up their employment rights. It is important that you understand the potential value of those rights (and the potential costs and risks of pursuing them).

  2. If it is a redundancy situation, is the calculation correct? There is an online calculator available at https://www.gov.uk/calculate-employee-redundancy-pay

  3. Is the employer paying a sum in lieu of notice or serving notice? What will be the tax treatment? Will the pay in lieu include a payment in lieu of benefits as well as salary?

  4. Will any company car require to be returned immediately? If not, what will the insurance position be for any period of retention?

  5. Settlement agreements usually contain confidentiality provisions restricting discussion about the terms of the agreement and sometimes also about the circumstances and existence of the agreement. In the lead up to a settlement agreement it can be helpful to be circumspect about whom you discuss your employment situation with. Professional advisers and spouses / civil partners are usually permitted under most agreements but if the employee has made wider disclosures, this can sometimes can cause difficulties.

  6. When you are moving on from employment, it can be important to clarify what reference your employer will issue if asked. Most employers issue fairly brief factual references these days – but it can be useful to check the terms won’t be damaging and make sure the agreed reference is recorded in the settlement agreement.

  7. Likewise it can be important to a departing employee how their departure is announced both internally and externally. Again settlement agreements can be used to give comfort that this will be done along agreed lines.

  8. Are there any insurances that the employer might agree can be continued post termination? If so, remember to consider any tax liability.

  9. It is common for the employer to make a contribution to the employee’s legal fees when entering a settlement agreement. It will be important to check with the solicitor whether this will cover the advice or whether there may be additional charges and how these will be arrived at.

  10. Many employees have contracts of employment that restrict them from certain types of competitive activities for a period after the employment ends. Depending on the circumstances, entering a settlement agreement may give an opportunity to negotiate the removal of the restrictions.

Get in touch

If you've been offered a settlement agreement by your employer we're happy to provide advice. Turn around times are often tight for finalising settlement agreements and you may require legal support fast. We can almost always accommodate same-day appointments, including outside normal office hours.

To make sure you're getting a fair deal, please get in touch with our team