Employees: What You Need to Know About Settlement Agreements

If you’ve been offered a settlement agreement by your employer (or are expecting one) you probably have a lot of questions. What is a settlement agreement? Do I have a right to negotiate it? How will it benefit me? Are there any red flags I should watch out for?…

Negotiating a settlement agreement may feel daunting. But when done right, this agreement could bring you considerable benefits and smooth the transition into the next stage of your career.

Below, we explain what to expect from your settlement agreement and how to achieve an outcome that meets your needs.

What is a Settlement Agreement?

A settlement agreement (previously called a compromise agreement) is a legally binding contract between an employer and employee. Its core purpose is to prevent the employee taking legal action (pursuing specific claims) against their employer, in return for financial payment/s. The agreement is used as a way to prevent or resolve employer/employee disputes and protects the commercial interests of the employer/company.

In return for forfeiting their right to pursue specified claims, the employee receives financial payments. We explain these payments in greater detail below.

When and Why Are Settlement Agreements Offered?

A settlement agreement can be offered to an employee at any time during or following their employment contract. However, it is usually offered in relation to terminating employment. For example:

• With an enhanced redundancy package: The agreement may offer the employee a larger redundancy payment than they are entitled to by law. This could be to reward loyal/long service or to prevent or resolve potential disputes that arise out of the redundancy process.
• Instead of capability or disciplinary procedure: The agreement allows the employee to avoid going through a long and emotionally-taxing capability/disciplinary procedure (or being fired). It ends their employment without damaging their long-term career prospects.
• As routine company policy: In some larger companies, settlement agreements are routinely made with all outgoing employees. Reasons vary, but it could be done to protect the company against the risk of future claims. So, even if you are leaving your employer on good terms, they may offer you a settlement agreement on a ‘just in case’ basis.

It’s worth noting that employers may offer a settlement agreement within the context of continued employment. For example, it is sometimes offered as a means of compensation for breach of the employment contract (on the employer’s part).

Your Legal Obligations

The settlement agreement must include clear details about exactly which claims the employee is prohibited from pursuing. The terms of the agreement will be negotiated and agreed between the employee and employer (and their respective legal teams).

As an employee, it’s important that you understand exactly what you are agreeing to in the contract. Do you understand what action the contract prevents you from taking?

Always seek legal advice. Your solicitor will explain the terms offered to you and can negotiate with the employer’s legal team on your behalf. This is imperative to ensure you achieve terms you’re happy with and fully understand your legal obligations.

Be aware: The terms written in a settlement agreement are legally binding. Therefore, if you breach the terms of the contract you may be required to repay the settlement payments you received, under an ‘enforceable repayment clause’.

Settlement Payments: How Much Will You Receive?

The exact amount you, as the employee, will receive in the settlement agreement depends on a number of factors, for example:

• Your salary
• How long you’ve worked for the company
• Your notice period
• Your age (if you are nearing retirement age you may receive a higher payment)
• How long the dispute would potentially take to resolve if a settlement is not reached
• The nature of your complaint/s against the employer

This list is not exhaustive. How much you receive will depend on the specific nature and complexity of your case.

In addition to financial payments, the terms of the contract may also impose a non-financial obligation on the employer – for example, your employer may be legally required to give you a reference (and stick to wording agreed in the contract terms).

Confidentiality Clauses

The majority of settlement agreements contain strict confidentiality clauses. These clauses are often highly restrictive, preventing the employee from discussing the contents of the agreement with anyone (or almost anyone).

The need for strict confidentiality is understandable. After all, say an employee had received a large settlement payment. It would defeat the purpose of the agreement if said employee proceeded to discuss their specified grievance with their friends, colleagues and 5,000 Twitter followers. They may not have taken legal action but the company’s reputation will have suffered all the same.

Although your agreement will include confidentiality clauses, it should also feature certain exclusions within these clauses. Importantly, you must be permitted to discuss the contents of the agreement with your specified legal advisor/s. You may also want to discuss your agreement with certain family members.

Be aware: Discussing the contents of your agreement with anyone not specified in the exclusions will be a breach of contract and could lead to court action against you.

Seek Legal Advice

The settlement agreement terms must be put in writing and the employee must seek independent legal advice on its terms. This ensures the contract is valid and legally binding. Your legal advisor should be an employment law solicitor or other certified advisor listed in the Employment Rights Act 1996.

Your legal advisor will review the contract and explain what’s being offered to you. They can also negotiate the terms on your behalf, to achieve terms that meet your needs.

Who pays my legal fees?

Although not a legal requirement most, if not all, employers will contribute a reasonable amount (called legal cost contributions) towards your legal fees incurred for obtaining advice on the settlement agreement.

Our experienced legal team have a strong track record of representing all level of employees. We take the stress out of settlement agreements by giving you a clear, tailored and cost-effective service. We will support you throughout the agreement negotiation to help you achieve terms that suit your needs.

Get in touch to speak to our specialist employment law solicitor today.

By: Glenn Gordon, Employment Law Solicitor at Goldstein Legal

This information contained in this article isn’t exhaustive and is meant only as a guide to settlement agreements. Please contact our team to discuss your situation further.