(Almost) Everything You Ever Wanted To Know About Settlement Agreements


3 September 2020

By Alexandra Dean

Settlement Agreements may sound a little bit like an ambiguous idea that no one really understands.

At the same time, it is another word that is making itself comfortable in our daily vocabulary like redundancy, especially because the two seem to be connected nowadays with so many people who are unfortunately losing their jobs as a result of the impact of Covid-19 on the UK economy.

Long gone are the days of a hushed conversation behind closed doors and a now-ex employee sneaking out of the back doors of the office with a brown envelope full of cash in order to leave quietly. Things now need to be more cemented and a contractual agreement is most appropriate, even in the most amicable of circumstances.

We have tried to collate some of the bigger questions that we are being asked about Settlement Agreements, but of course the team is available to provide advice and guidance as you might require. As always, this does not substitute legal advice, but is meant for general information.

What is a Settlement Agreement?

In short, it is a contractual agreement between an employer and an employee confirming that the employer will pay a sum of money to the employee in exchange for the employee waiving their rights to any claims against the employer arising out of or in connection with their employment or its termination. In the past, they used to be known as compromise agreements, but it is still the same thing.

The Settlement Agreement can also result from an agreement between the employer and employee to replace any formal process – such as redundancy, performance management proceedings or even disciplinary process. It is most common for redundancy and not the latter two, but still possible.

Do I have to accept a Settlement Agreement?

No, not at all. There is no 'gun to your head' type of obligation that would force you to accept it.

However, it is often the case that once such an offer is on the table, it is your best bet and you should seriously consider it. This could be for a whole host of reasons – whether it is because the company is offering you a decent exit package instead of an upcoming disciplinary that, deep down (between your head and your heart) you know that it will not go your way or perhaps they are offering you an enhanced redundancy package simply to save the heartache and headache of going through the full redundancy process with you when you and your employer know how it will most likely end.

What if I don't want to accept the Settlement Agreement?

It very much depends on the circumstances, but in most cases you will just continue to be employed as normal and potentially a formal process of sorts will commence or continue if one was considered already.

I want to accept a Settlement Agreement, now what?

We can be cheeky here and say – come instruct us then we will tell you… Whilst it is a great option, the general answer is:

This is where you will need to instruct an independent legal adviser – i.e. a solicitor. You will need to obtain independent legal advice from a solicitor that is not already acting for or is connected with your employer and they will have to go through the full Settlement Agreement with you and advise you on its terms, its effect on you and the potential claims that you are giving up by signing it.

More often than not, your employer will contribute towards your legal fees for undertaking this advice and those fees are usually payable directly to the legal representative that you instruct upon presentation of an invoice.

Can I negotiate a Settlement Agreement?

Of course you can. If not, you can ask us to negotiate it for you. We are very much in favour of getting the best possible deal out of the Settlement Agreements, where it can be achieved and depending on the specifics of your case.

Whilst there are situations where we would recommend that you negotiate as you might be able to obtain a better settlement, or perhaps to give you more of a financial cushion in an uncertain time, it is not always appropriate and we will be mindful and advise of you that too. We would not advise you to make unreasonable requests or ones that do not have substance or grounds.

What can be included in a Settlement Agreement?

The general clauses that we will expect to see include:

Sums of money payable to you under the contract – e.g. notice period, accrued but untaken annual leave and expenses;

Compensation payment if one is agreed that is usually an ex-gratia / tax free payment (that may, for example, include the statutory redundancy payment if the Settlement Agreement is offered in a redundancy situation);

Full and final settlement clauses – confirming that the Settlement Agreement settles any and all potential claims between the parties;

Confidentiality clauses whereby the parties keep the terms and existence of the Settlement Agreement confidential;

Clauses confirming that neither party will make derogatory remarks about the other;

Agreement for the return of company and / or personal property; and

An agreed reference that the employer will provide to any potential employer that requests it (which is usually a factual reference nowadays, in line with what most employers offer in any event).

Please note that the above are just some of the main clauses although they are not a full list of what you would expect to her.

Can I ask for a Settlement Agreement?

Yes, technically there is nothing to stop you from approaching your employer and opening up the discussion for an exit package if your circumstances call for it. This is very situational and should only be considered on a case by case basis.

Can my employer withdraw a settlement offer once it is made?

Technically, yes they can BUT (yes, this is a big but) once it has been offered to you and on the premise that you are negotiating or dealing with it meaningfully and in good faith (meaning you are not just messing them around or taking an unreasonable amount of time to deal with it, for example) then it would not be in their interest to withdraw the offer and it is unlikely that they would do.

What is a fair settlement amount?

This is very subjective because it depends on a number of factors – mostly the circumstances leading to the offer of a Settlement Agreement, your position and length of service with your employer. When going through and advising you on the Settlement Agreement, your legal advisor will be able to let you know whether and why they consider your offer to be fair or not.

Does a Settlement Agreement always replace redundancy?

We touched on this above, but it is not always the case. This just seems to be a very common one because companies may offer an enhanced redundancy package to those employees that are at risk, with the requirement of signing a Settlement Agreement to avoid the formal consultation process that is required which takes up time and resources on the employer's part and is also quite difficult for the employee for various reasons.

However, a Settlement Agreement can be offered for a whole host of reasons such as to prevent an unpleasant departure due to  a disciplinary or complaint against the individual. And sometimes, a Settlement Agreement can be offered for no reason at all beyond the fact that the employee wishes to leave the business on their own accord and are being offered a goodwill payment for which the company just wants some contractual protection.

How can Gepp's Employment Team help?

Great question! Our expert team can help at any stage of the process – we can go through the Settlement Agreement with you and advise you on it to sign it off and ensure you get paid or we can get a lot more involved and actually negotiate the Settlement Agreement into fruition where it is appropriate to do so.

If you are not sure, you just have to ask and we can tell you how we might be able to help.

Please do not hesitate to contact our team if you have any questions or if you have been offered a Settlement Agreement and want to instruct us.

We are always happy to help and are very keen on transparency so we will let you know how and if we believe we can help you achieve your objectives. We can be contacted via the contact form on our website, via email or on 01245 228141.

This is not legal advice; it is intended to provide information of general interest about current legal issues.