Being offered a settlement agreement can bring mixed emotions. For some employees, it provides a welcome opportunity to leave their employment on agreed terms and move forward. For others, the offer may arrive unexpectedly following a redundancy process, workplace dispute, performance concerns or a breakdown in the employment relationship.
Whatever the circumstances, a settlement agreement is an important legal document. By signing it, you will usually agree not to pursue certain employment claims against your employer. Settlement agreements are voluntary, and the initial terms offered by an employer do not necessarily have to be accepted.
Before signing, here are ten important points to consider.
1. Understand exactly what you are being paid
The agreement should clearly explain every payment you will receive.
This might include salary up to your termination date, payment in lieu of notice, accrued but unused holiday, bonuses or commission, redundancy pay and an additional termination payment.
Do not simply focus on the headline settlement figure. Understanding how the overall package has been calculated can help you assess the offer properly.
2. Check your notice entitlement
Your employment contract will normally specify the notice your employer must give when terminating your employment.
Depending on the circumstances, you might work your notice, be placed on garden leave or receive a payment in lieu of notice.
Check that the agreement correctly reflects your contractual and statutory entitlements.
3. Consider whether the compensation is appropriate
There is no single figure that makes a settlement agreement reasonable in every case.
The appropriate amount will depend on factors such as your salary, length of service, contractual rights, the circumstances surrounding your departure and any potential employment claims you might have.
This is one reason obtaining advice on your individual circumstances is important.
4. Understand which claims you are giving up
This is one of the most significant parts of a settlement agreement.
The agreement will normally identify employment claims that you agree not to pursue after signing. Acas confirms that a valid settlement agreement must relate to specific complaints or proceedings and specify the legal claims it covers. A general statement purporting simply to settle every possible claim is not, by itself, sufficient to contract out of Employment Tribunal claims.
Your solicitor should explain the effect of these provisions before you sign.
5. Check the tax provisions
Different elements of a termination package can receive different tax treatment.
Salary, holiday pay and payments relating to notice are generally treated differently from qualifying termination payments. Tax can become particularly important where substantial sums are involved.
The agreement may also contain a tax indemnity requiring you to meet certain liabilities if HMRC later determines that additional tax is due.
Make sure you understand the tax provisions rather than assuming the entire settlement payment will be tax-free.
6. Look carefully at confidentiality clauses
Many settlement agreements contain confidentiality provisions.
These may restrict disclosure of the settlement terms or confidential information belonging to the employer.
Read these clauses carefully and understand what you can and cannot discuss. You may also want appropriate exceptions allowing you to speak to close family members, professional advisers, medical professionals or relevant authorities where appropriate.
7. Agree the wording of your reference
If you are leaving your employment, your next job may already be on your mind.
Where your employer has agreed to provide a reference, consider having the wording attached to the settlement agreement. Acas recognises that settlement agreements can include an agreed job reference.
This can provide greater certainty about what a future employer will receive.
You should also check whether the agreement addresses verbal references and responses to future enquiries.
8. Review restrictive covenants
Your existing employment contract may contain restrictions applying after you leave, such as provisions concerning competitors, clients, employees or confidential information.
The settlement agreement may preserve, amend or sometimes introduce obligations.
If you intend to join a competitor, establish your own business or continue working within the same industry, understanding these restrictions can be particularly important.
9. Make sure you have enough time
You should not feel compelled to sign immediately.
The Acas Code recommends that employees should generally be allowed at least 10 calendar days to consider formal written settlement terms and obtain independent advice, unless the parties agree otherwise. What constitutes a reasonable period can depend on the particular circumstances.
If you have been given an extremely short deadline, discuss this with your adviser.
10. Obtain independent legal advice
Independent advice is not simply a useful precaution.
For a settlement agreement to satisfy the statutory requirements, the employee must receive advice from a relevant independent adviser about the terms and effect of the proposed agreement and its impact on their ability to pursue the relevant claims. The adviser must also meet particular requirements, including appropriate insurance.
Employers commonly offer a contribution towards the cost of this advice, although Acas notes that they are not legally required to do so.
How Penerley Solicitors can help
A settlement agreement can determine both the financial terms of your departure and important rights that continue after your employment ends.
At Penerley Solicitors, we advise employees on settlement agreements, helping clients understand the proposed terms, identify potential concerns and approach negotiations where appropriate. Our aim is to provide clear, practical advice so that you understand exactly what you are agreeing to before signing.
If you have received a settlement agreement and require independent legal advice, contact Penerley Solicitors to discuss your circumstances.
