Settlement agreements – 10 answers for employees who have been offered a settlement agreement

1. What is a settlement agreement?

A settlement agreement is a legally binding agreement outlining the terms of settlement between an employee and employer. Usually, the employer will agree to pay the employee a sum of money and in return the employee will agree not to pursue claims against the employer. As such, the employee is seen to have settled his or her claims.

2. Why do I need to meet with a lawyer?

In most case, two parties are free to enter into a legally binding contract with one another. However, because an employee may be giving up valuable rights by signing a settlement agreement, the law seeks to protect employees by requiring them to take independent legal advice before they sign. As such, the law states that for a settlement agreement to be valid it must 1) be in writing; 2) relate to a specific claim or complaint; 3) be signed by the employee 4) confirm that the employee has received independent legal advice, 5) confirm the legal adviser must be identified and must be insured and 6) record that the rules regulating settlement agreements have been satisfied.

In other words, the law insists that an employee meets with a lawyer or trade union adviser.

3. Why have I been offered a settlement agreement?

There are lots of different reasons why employers choose to use a settlement agreement. Usually an employer will offer a settlement agreement to protect itself from claims against an employee.

The most common claims an employer will seek to protect itself from are claims of discrimination, unfair dismissal, wrongful dismissal, holiday disputes, breach of contract and harassment.  However, the particular claim that an employer will want to protect itself against will depend on each employee’s employment history.

Nevertheless and very often, employers offer settlement agreements as standard practice and it does not mean they think you are going to sue them and they are simply a way of an employer giving itself additional protection.

4.  Am I getting a good deal and how do I know whether I should sign an agreement?

Whether you are getting a good deal will depend on the facts of each case. Strictly speaking, in order to comply with the statutory minimum requirements for a valid settlement agreement, your lawyer is not required to advise the employee on the merits of any potential legal claims against the employer, i.e. whether the agreement represents a good deal or a bad deal.

Despite this, you may need to discuss with your solicitor whether you have potential claims against your employer and your chances of winning these claims. You also need to understand the realistic value of these claims. Generally speaking, an employee’s main loss will be his or her loss of earnings until they find a new job. As such, there are key questions you should ask yourself, for example, how long do I think it will take me to find another job? Is my sector facing a particularly difficult spell? How long would it take for me retrain in a different area? What evidence do I have to support my potential claims?

Once you know all this and you have taken independent legal advice, then you will be in a better position to judge for yourself whether you are happy with the settlement package.

5. Can you negotiate a settlement agreement?

A lot of people are satisfied with the offer and the agreement and are happy to sign the agreement without further negotiation.

However, each person’s background and employment history is different. If, after receiving advice, you are unhappy with the amount of compensation or the wording of the agreement, then it may be appropriate to negotiate.  We have more than 15 years’ experience of negotiating settlement agreements.

6. What will the agreement say? 

Each agreement is different. However, it is usual for an agreement to provide the following provisions.

–    The amount of settlement;
–    If applicable, the employee’s last day of employment;
–    The employment claims that will be waived by the agreement;
–    Confirmation that you have taken legal advice and who from;
The agreement may also include clauses which deal with:
–    A reference;
–    Confidentiality provisions;
–    Post-termination covenants;
–    The tax treatment of the payments;
–    Non-disparagement clause
–    Return of company property;

We will be able to explain what each clause means in everyday language and how they affect you.

7. Will I have to disclose that I signed a settlement agreement to my next employer and can discuss the settlement publicly?

There will be no obligation for you to disclose the existence of a settlement agreement to your next employer. In fact, confidentiality provisions may prevent you from disclosing the fact you signed a settlement agreement at all. However, it is possible for the parties to discuss and agree what you will say to your next employer

8. Settlement agreement v compromise agreement.

Your employer may have referred to a compromise agreement. This is old terminology and the government changed the name from compromise agreement to settlement agreement in July 2013, but apart from that they are the same.

If you are an employer still offering your employees compromise agreements, then it is likely that your agreement is out of date and may not be giving you the necessary legal protection. It would be prudent to have an employment law specialist review your agreement to ensure it adequately protects your business. The Waterfront employment department can prepare a suitable up to date agreement on a fixed fee basis.

9. How much will a lawyer cost and how long will it take?

It is typical for the employer to contribute towards the employee’s legal costs, which are usually in the region of £500 plus VAT for simple agreements but can be more depending on the circumstances.

The fee you pay usually covers initial advice on the effects of signing the agreement and we will always seek to have our fees paid by your employer rather than from you.

10. What if I decide that I do not want to sign the agreement?

If you decide that you do not want to sign the agreement, then the first step will be to see if you can negotiate an increase or make the necessary changes to the agreement. If an agreement