What do workers need to know about settlement agreements?

Due to the impact of the coronavirus pandemic on businesses across the UK, some employers have had to make the difficult decision to reduce their workforces. This seems to have led to an increase in employees being offered settlement agreements.

Formerly called ‘compromise agreements’, settlement agreements are binding contracts under which an employee agrees to give up certain employment rights and not take legal action against their employer or former employer, usually in return for financial compensation.

Peter Nicholson, senior associate and solicitor in Nelsons’ employment law team, said: “Settlement agreements are often used as a way to end an employment relationship by reaching a mutual decision. It’s perhaps unsurprising that we have experienced a recent surge in enquiries about settlement agreements as the past few weeks have, sadly, seen waves of redundancies take place across the UK.

“As an employee, there are a number of potential benefits to a settlement agreement, such as compensation (this may be tax-free up to £30,000), certainty and peace of mind.”

What does a settlement agreement generally cover?

Different settlement agreements contain different clauses, depending on the circumstances. However, settlement agreements tend to cover issues such as:

  • Leaving arrangements (i.e. the date on which you will finish and whether or not a notice period will be worked)
  • Money payable to the employee
  • Tax treatment of money payable to the employee under the agreement
  • Waiver by the employee of claims against the employer (e.g. unfair dismissal, breach of contract etc.)
  • Confidentiality
  • References
  • Legal advice
  • Return of employer property.

Do I have to accept a settlement agreement offer?

No. If you are not happy with the terms that your employer or former employer has offered to you, you do not have to sign the settlement agreement.

For example, if you feel like you’ve been given an unreasonable ultimatum or are being pressured into signing the agreement, you can decline to sign it. If negotiations are unsuccessful, you may have grounds to bring a claim in an employment tribunal. Remember that there are strict time limits, generally three months, to bring a claim.

Is there a time limit for me to accept the settlement agreement offer by?

Technically speaking, there is no strict legal time limit. However, Acas guidance says that employers ought to give you a minimum of ten days in which to decide whether or not you wish to accept their offer. Your employer should not ask you to agree to it immediately or pressure you into signing.

Do I need a solicitor to advise me?

In order for a settlement to be legally binding, you must obtain independent legal advice on its terms and effect. It’s important you understand the legal effect of the agreement and the impact on your employment and finances as, once you’ve signed it, you can’t change your mind.

What about payment?

It’s usual for your employer to contribute to your legal fees under the terms of a settlement agreement. This tends to come in the form of a fixed sum, which may be sufficient to cover advice on a straightforward settlement agreement where you are happy with the terms.

Should you be in a situation where you require legal assistance in improving the terms of a settlement agreement, or if the matter becomes contentious and it looks like fees will exceed the contribution offer, your solicitor may seek to negotiate a higher contribution from your employer.