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Settlement Agreements: Frequently Asked Questions

If your employer has offered you a settlement agreement, you may have a few questions. Ranging from what a settlement agreement actually is, to how to deal with them as an employee, this article aims to answer any questions you may have, all from a solicitor’s point of view.

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What is a settlement agreement?

A settlement agreement is a legally binding document between an employee and employer. They usually come about at the termination of employment as an alternative to an employment tribunal. And, they are designed to settle any claims that the employee may have by offering them some form of a payout. In exchange, they cannot take the employer to a tribunal.

Why am I being offered a settlement agreement?

There are several situations in which an employee is commonly offered a settlement agreement. Employers typically offer them to ensure that they cannot be taken to an employment tribunal. Everybody can move on, with all disputes settled and a legally binding document in place to confirm this. These agreements can also save the employer time and money instead of going through a lengthy disciplinary or tribunal procedure.

Settlement agreements exist in both individual and group formats. The latter is normally used when multiple people are being made redundant or dismissed, and the employer wishes to offer a larger voluntary redundancy package. For individuals, settlement agreements are offered for many reasons, including poor employee performance, redundancy, and employee grievances.

An agreement may also be offered to an employee who is not leaving their employment. This is a less common scenario and is usually used to settle disputes.

Why do I need a solicitor for my settlement agreement?

A settlement agreement is a legally binding document, so it is vital to get legal advice before signing one. By signing it, you agree to settle on all of the listed claims. This is often a hugely comprehensive list, including breach of contract, constructive dismissal, unfair dismissal, claims of discrimination, and more. In short, by signing an agreement, you will not be able to take your employer to an employment tribunal. Legal advice is required as you can still take your employer to a tribunal if you do not get it because the document will not be binding.

A solicitor will be able to ensure that the agreement you’re signing is fair and legal. They’ll also be able to advise you on what you may be able to receive at an employment tribunal, and so which option is likely to be more favourable to you.

Finally, they may be able to highlight any areas in which you’re being discriminated against under the Equality Act that you may not be aware of. In these cases, you may have an unfair dismissal claim and be awarded an additional sum that may be more favourable than signing an agreement.

Is a settlement agreement the same as a compromise agreement or redundancy?

Before July 2013, settlement agreements were known as compromise agreements. In essence, they are the same thing. However, alongside introducing a new term, the government also introduced the concept of pre-termination negotiations. This allows employee and employer to discuss settlement before anything is signed, whilst reducing the risk of the conversations being used in a tribunal.

Unless there has been ‘improper behaviour,’ such as an employee suspects they are being offered a settlement agreement due to a protected characteristic such as pregnancy or disability, these conversations cannot be used as evidence in an unfair dismissal case. They are ‘protected conversations’.

In terms of redundancy, it is not the same as a settlement agreement. Redundancy usually comes about because the business no longer requires a particular role, or changes in the organisation, such as location, mean that an employee can no longer work there. To make an employee redundant, employers must go through a lengthy fair redundancy procedure. So, they may offer a settlement agreement as an alternative to this.

Often, this is a win-win situation, with employees being offered more money and employers not having to go through the procedure. But, it is advisable to consult with your solicitor to make sure this is the case before you agree to anything.

Settlement agreements and protected conversations

Suppose you have had a ‘protected conversation’ about any part of your settlement agreement, and the negotiations around the agreement later fail. In that case, the contents of the conversation cannot be used in court. But, if it is an ‘open conversation,’ they may be. Protected conversations give both parties the chance to have an off-the-record discussion about the prospect of a settlement agreement.

You may also receive a letter or have a conversation that is ‘without prejudice’. For this to be the case, there must be an existing dispute or intention to bring about a claim or legal proceedings. Or, a discussion that aims to settle a dispute, such as the offer of a settlement agreement. The difference between this and a protected conversation is that there doesn’t need to be an existing dispute for the conversation to be protected.

A protected conversation takes place when an offer of a settlement agreement is made. This means that the employee cannot bring up this conversation in court. However, this is not the case if the employer acts improperly; for example, they put undue pressure on the employee or misrepresent the circumstances. In these cases, the employee will still be able to refer to the conversation in the event of an unfair dismissal claim. As a result, many employers are hesitant about protected conversations unless they deem the employee in question to be low-risk about raising a case of unfair dismissal.

If you are confused about protected and without prejudice discussions, whether you should have them, and what they mean for you in terms of settlement agreements, your solicitor will be able to advise you.

What are the benefits of a settlement agreement vs going to an employment tribunal?

In many cases, if you wish not to accept the settlement agreement offered to you by your employer, the next step is taking them to an employment tribunal. But what are the benefits and risks of these options? Every case is different, and a solicitor will be able to advise you on your specific circumstances. But, some of the generic points to consider include:

  • Certainty. With a settlement agreement, you can be sure that you will receive what has been set out. And, all parties can move on, having gained what they wanted out of the agreement. However, with a tribunal, as with any kind of court case, you cannot be sure that you will win and get the outcome you desire.
  • Speed. Settlement agreements are usually completed relatively quickly. A tribunal often comes with many delays that mean you have to wait longer for your payout.
  • Value. With a settlement agreement, you know exactly how much you are going to receive. On the other hand, you may have an idea of the value of any potential claims with a tribunal. However, you will not know the total amount until the tribunal has taken place.
  • Court. Settlement agreements take place outside of court. But, you would be required to attend court for as long as a tribunal takes to be heard.
  • Stress. With a settlement agreement, you can quickly move on and put the stress of the situation behind you. But due to the more lengthy nature of tribunals, you may be heavily involved in the case for longer, which can be stressful.
  • Legal costs. Finally, settlement agreements come with little to no legal costs for the employee. There is no guarantee that you will not have to pay legal fees in a tribunal case, which can quickly become expensive.

Overall, whether you choose to go down the settlement agreement or tribunal route will depend on your case. A solicitor will be able to advise you on what you might be able to expect out of a tribunal and which could be the better option for you.

What happens if I reject a settlement agreement?

As an employee, you are free to reject a settlement agreement offer put to you by your employer. You may wish to do this if the offer is too low, or you would prefer to go to an employment tribunal. From there, you can either negotiate, i.e. go back to your employer with the terms you would like and see if they are open to negotiation. Or, you can choose to take things further and proceed to a tribunal instead. Your solicitor will be able to advise you on your specific case.

Can I negotiate a settlement agreement?

Yes. If you feel that the offer is too low, you can negotiate the terms. Your solicitor will be able to give you tailored advice. But, the key is to be sensible in your negotiation. There is no point in negotiating unreasonably high, as it is likely that it will be immediately rejected. In short, the offer needs to be reasonable for both sides.

Alternatively, you can tell your employer that their offer is far too low, and you will not accept it, without coming back with a counteroffer. This is a strong move that may result in a better offer but could also result in the case going to a tribunal instead. So, it is up to you and your solicitor to weigh up the benefits and risks of each option before going ahead.

What does a settlement agreement typically include?

Every settlement agreement will include different things. It’s important to note that the final terms will not be decided until after any negotiations. But, there are some general aspects that a settlement agreement should cover. These include:

  • Notice pay
  • Any holiday pay that you have accrued
  • The value of the payment paid to the employee in return for agreeing to the termination of the contract
  • Legal costs
  • Which payments are tax-free and which ones will require tax and NI payments
  • Any non-disclosure agreements. Usually, these will be beneficial for both parties
  • A waiver, which means the employee agrees to waive all rights they have against the employer
  • Practical information such as handover documents
  • A reference for the employee

How much does a settlement agreement cost?

As legal advice is essential for a settlement agreement, your employer should pay for you to seek the advice of a solicitor. The cost of a settlement agreement can vary depending on your position, whether you wish to negotiate, and what the settlement itself includes. Some employers will pay a set amount for legal costs, while others will allow you to seek the advice of a solicitor at any cost. To get an idea of how much a settlement agreement will cost, please get in touch here. (Insert link/ button to contact)

Is the settlement agreement I’m being offered fair?

As an employee, it’s natural to want to ensure that you’re getting a fair deal with your settlement agreement. Whether the agreement is fair and reasonable will depend on your specific circumstances.

Remember, in theory, a settlement agreement is there to cover any loss of earnings and benefits that you will incur by terminating your contract. So, your appointed solicitor will be able to take all of this into account when they look over your agreement. From there, they will be able to advise you on whether it is fair or whether you may want to consider negotiating or taking it to an employment tribunal instead.

Do I have to pay for a settlement agreement solicitor?

In most cases, no. It is standard for your employer to provide you with a reasonable sum to cover the associated legal costs. So, you should not be left out of pocket to seek the necessary advice. At Setfords, we offer a free initial consultation for settlement agreements. Just click the button below to get yours.

How long does it take?

The amount of time that it takes to negotiate and sign your settlement agreement varies on a case-by-case basis. For example, if your solicitor advises you to accept the agreement as it is, it can be completed within a matter of days. However, if changes can be made and you wish to negotiate, it can take longer. This usually depends on your employer responding to your negotiations in a timely and reasonable manner. From here, your solicitor will be able to provide you with a realistic timeline.

Here at Setfords, we can offer a quick turnaround to complete your settlement agreement within 48 hours in many cases. This leaves you free to accept your settlement and move on, which can be a massive relief for many of our clients.

When will I be paid from my settlement agreement?

Once you have signed your settlement agreement, you will likely be eager to receive what the document has set out for you. Until your employment is officially terminated, you should be paid your salary as usual. Then, your lump sum is normally paid out once your employment ends. This is usually within a timeframe of 14-28 days, depending on your employer. You may be able to negotiate to have the payment date brought forward to a specific date if this is a concern for you.

Are settlement agreements taxable or subject to NI?

Some payments are subject to tax and National Insurance (NI), while others are not. In general, the first £30,000 of the payment is tax-free, but this is not always the case. For example, payments made up until formal termination, including that in lieu of holiday, will be taxable. The agreement should clearly set out what is taxable and what is not.

It’s important that you pay the correct tax on any payments arising from a settlement agreement. If you do not, and your employer must pay tax after the fact, they will likely chase you down for it. If in doubt about the payment of tax and NI on your settlement agreement payments, ask your solicitor for advice.

Can I ask for a settlement agreement as an employee?

Yes. While it is not as common as an employer bringing about the process, an employee can ask for a settlement agreement. For example, you may wish to do so if you believe you could take your employer to an employment tribunal but would prefer not to due to the stress and time involved. However, your employer has no obligation to agree to your request.

Who can advise on settlement agreements?

For your settlement agreement to be legally binding, you must have received advice from one of the following:

  • A qualified lawyer
  • A Trade Union official who has been certified and authorised by the union as able to give out this advice
  • An advice worker (such as from the Citizens Advice Bureau), who has been certified as competent to give out this sort of advice. They must not have received payment in any form.

How can Setfords help me?

At Setfords, our solicitors are experts in dealing with settlement agreements. Our employment law specialists can advise you on all aspects of your settlement agreement, including if the terms are right for you. We can also help you to get a sum that genuinely reflects the strength of any potential claims you may have. And, we can offer a quick turnaround of 48 hours or less in many cases. To get in touch with our solicitors today, please give us a call or fill out the form below.

This note is not intended to substitute legal advice from your instructed lawyer. You should always consult with your lawyer directly regarding any specific queries you may have.