A settlement agreement is a legally binding contract between you and your employer. In exchange for a payment, or sometimes other terms such as an agreed reference, you agree not to bring certain claims against them. They are most often offered when a job is ending, but they can also be used to settle a dispute while you are still employed.
Being handed one can be unsettling, especially if it arrives with little warning. This guide explains how they work in England and Wales and what to look at before you sign.
Why your employer is offering one
Employers use settlement agreements to end a working relationship cleanly. For them, the value is certainty. Once the agreement is signed, you usually cannot take them to an employment tribunal over the matters it covers.
An offer does not mean you have done anything wrong, and it does not mean your employer accepts they have. It is a commercial arrangement. Sometimes the offer comes after a “protected conversation”, a discussion the law generally keeps out of any later unfair dismissal claim, so that both sides can talk openly about ending employment.
Why you need an independent adviser
A settlement agreement only stops you bringing statutory employment claims if certain conditions are met. The most important is that you have received advice from a relevant independent adviser on the terms of the agreement and what it means for your right to bring a tribunal claim.
The adviser must be a qualified lawyer such as a solicitor, or one of a small number of other qualified people, and must be covered by insurance. They sign a certificate confirming they have given you that advice. The agreement must name them.
Without that certificate, the agreement does not prevent you bringing those claims. That is why your employer will usually insist on it, and why they will normally contribute towards your legal fees for the advice. The amount they offer to pay is set out in the agreement.
What to check
The money
Look at what is being paid and when. A settlement payment may be made up of several parts.
- Pay up to your last day and any holiday you have not taken.
- Notice pay, or pay in lieu of notice.
- Any statutory or enhanced redundancy pay.
- A compensation payment for ending your employment.
These are treated differently for tax. Pay, holiday pay and notice pay are taxed in the normal way. A genuine compensation payment for loss of employment can often be paid tax free up to £30,000, with tax due on anything above that. Your adviser should check how each part is described.
Check the payment date too. Some agreements tie payment to a condition, such as returning company property or signing again on your last day.
The claims you are giving up
Most agreements waive every claim you could bring, known or not. Your adviser should go through the claims that might apply to you, such as unfair dismissal, discrimination or unpaid wages, and help you decide whether the payment reflects what they could be worth.
Some rights cannot be signed away, including pension rights you have already built up. Personal injury claims you do not yet know about are usually excluded too.
The other terms
- References. Many agreements include an agreed reference. Make sure the wording is attached and that the employer commits to using it.
- Confidentiality. You may be asked to keep the agreement and its terms private. You should still be able to speak to your partner, your professional advisers and the authorities.
- Comments about the employer. Clauses that stop you saying anything negative about the business are common. Ask for the employer to agree something similar about you.
- Restrictions after you leave. If you have restrictions in your contract on working for competitors or contacting clients, the agreement may repeat or extend them.
- Warranties. You will usually confirm facts such as that you have not accepted another job. If you have, say so. A false warranty can mean repaying the money.
Negotiating the offer
The first offer is not always the final one. If you have a strong claim, your adviser can put forward a higher figure or better terms, such as a longer notice period, a different leaving date or an improved reference.
Negotiation takes time, and you should be given a reasonable period to consider the agreement. The ACAS code of practice on settlement agreements suggests at least ten calendar days.
Things to avoid
- Signing anything before you have had independent advice.
- Assuming the agreement can be undone later. Once signed, it is very difficult to challenge.
- Missing a tribunal deadline while you negotiate. Most claims must be started within three months less one day, after ACAS early conciliation. Talks do not pause that clock on their own.
If you have been given a settlement agreement, call us on 0161 496 0123 or send us a copy through our enquiry form. We will explain what it means for you, tell you whether the offer looks fair and sign the adviser’s certificate once you are happy.
Need advice on this? See how our employment team can help, or book a consultation.