When should you consider signing a settlement agreement?

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Settlement agreement when to sign?

A settlement agreement is a binding contract between employer and employee.

Settlement Agreements are routinely used with redundancy and other situations where an employee’s employment is being ended and generally it’s fine to sign a settlement agreement. For a Settlement Agreement to be valid, the employee must get independent legal advice on the agreement before they sign, because by signing it, they are giving up their rights to bring employment claims. On the basis that you wouldn’t sign a settlement agreement unless, having taken specialist advice on the terms, you’re happy with the deal, it would be very unusual to advise that you shouldn’t sign a settlement agreement at all.

What is a settlement agreement?

A settlement agreement is the only way in which an employee can validly give up their claims against their employer in relation to their employment or the termination of their employment. Usually, the employer will pay what they have to pay the employee (usually notice pay, accrued holiday pay, and statutory redundancy pay if it’s a redundancy), plus an additional compensation payment.

To be valid, a settlement agreement has to comply with various requirements, including:

  • The agreement has to list all the specific claims being given up
  • The employee has to get independent legal advice on the terms and effect of entering into the settlement agreement, specifically on the impact on their ability to bring a claim
  • The agreement has to name the solicitor who has given the advice to the employee

In addition, employers will usually pay at least a contribution to the employee’s fees for the required legal advice.  Although there’s no obligation on the employer, it’s ultimately for their benefit that the employee signs the settlement agreement, so it’s expected that the employer covers the employee’s fees.  In complicated cases, the contribution can be significant, but in straightforward cases where the terms are agreed already, employers will generally contribute about £500 to £750 plus VAT.

What is a good settlement offer?

The contractual and statutory sums paid are just what the employer has to pay on termination – things like notice pay, holiday pay and statutory redundancy pay. There’s no compensatory element in these payments, and no reason to give up your rights in return for getting payments you’re entitled to anyway.

It’s usual for employers to pay an additional compensation payment on top of your entitlements in order to persuade you to sign the settlement agreement and give up your rights to claim. A compensation payment will be anything from a “commercial” amount that’s just enough to act as a sweetener to persuade the employee to sign, to a significant sum to compensate the employee in respect of their claims.

The former is usual in a straightforward redundancy where the settlement agreement is just a tool to draw a line under the matter, but the employee doesn’t have any particular claims or complaints. The latter will happen where the situation is complex, and the employee has substantive claims – perhaps they’ve been through a grievance before negotiating an exit with a settlement agreement.

Broken chain

A settlement agreement provides a clean break when an employee leaves.

What are the benefits of signing a settlement agreement?

The benefit for the employer is that they will know the employee can’t come back and bring any claims against them. It’s important to remember that the agreement isn’t just for the employee’s benefit!

The benefit for the employee is that they will be able to get a tax-free compensation payment in addition to their contractual and statutory entitlements to payments like notice pay, holiday pay and statutory redundancy pay.

What are the risks of signing a settlement agreement?

With specialist legal advice, the risks of signing a settlement agreement will be negligible, in that you’ll be made fully aware of the things that you’re committing to by signing.

There is usually a selection of obligations that limit what you can do in future, such as confidentiality obligations that prohibit you from talking about the existence or terms of the settlement agreement. The agreement may also include some fairly scary terms that say that if you bring a claim (which remember would be a breach of the agreement), then you’ll have to repay the compensation and pay your employer’s legal costs for defending your claim. Your solicitor will ensure that you understand what you’re agreeing to.

It follows that the “risks” to you of signing a settlement agreement would only arise if you breach the agreement.  Don’t sign anything you aren’t content to live with!

Settlement Agreement legal advice

We can give independent, pragmatic legal advice on the terms of your settlement agreement. Our fees start at £500 plus VAT, which we think is pretty reasonable for the service we provide. We will always go through the whole agreement with you and talk about whether you’re happy with the payments to be made, and the other terms (such as confidentiality, restrictive covenants, and terms about your future employment). We don’t just advise on what the agreement says without considering whether amendments are appropriate.

With our fees starting at the above rate, we’ll usually be able to stick to your employer’s contribution to fees.  If their contribution is unreasonably low, we’ll always try to get them to increase rather than ask you to pay.

If you need independent legal advice on a settlement agreement, then do reach out to our expert solicitors.  You can leave a comment below, email employment@qlaw.co.uk or call 03300 020 863.

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