I’m being offered a settlement agreement. Should I accept?

A major consequence of the pandemic is that our economy is suffering. This is having an impact on everyone with companies and businesses of all sizes and across different sectors finding themselves in financial difficulty. The government has put financial support in place to try and keep businesses afloat during this period. This includes the Coronavirus Job Retention Scheme (furlough) which, to the relief of most people, has been extended to 31 March 2021. Despite this, some businesses are having to make difficult decisions such as reducing staff numbers or shutting down sites. Unfortunately, some businesses will have no alternative but to close down altogether. 

If you are in the unfortunate position of being made redundant or your employment is coming to an end for another reason, you may be offered a settlement agreement. If you are, it is important to understand what a settlement agreement is and the reasons why you might be offered one.  

A number of people have been in touch asking about settlement agreements and we’ve answered the most common questions asked.

What is a settlement agreement?

A settlement agreement is a formal document which allows for a clean break between you and your employer, enabling you to leave on mutually agreed terms. Essentially, you agree not to bring an employment claim against the company and in return they will pay you an enhanced sum of money on the termination of your employment.  

When might I be offered one?

A settlement agreement must relate to a particular complaint or proceeding, so they’re often used when there is a dispute between employee and employer. They are also used in situations where a fair disciplinary or termination process is not being followed in order to allow the relationship to come to a quick and dignified conclusion.

We are currently seeing many settlement agreements being offered as part of a redundancy process. For example, the employer offers voluntary redundancy with redundancy payments that are larger than the statutory minimum amount which is conditional on the employee entering a settlement agreement. Agreeing to a settlement agreement can sometimes prevent the lengthy and stressful formal redundancy process.

Do I have to accept the settlement?

No, but your employer might only make an enhanced payment on condition you sign the agreement, and you might be turning down the best offer you’ll get if you don’t accept. This is something that your solicitor will be able to discuss with you and advise you on in more detail. 

It’s important to note that if you take legal advice but decide not to accept the terms offered, you may have to pay your solicitor’s fees personally – employers will only contribute towards your legal fees if you agree to sign the settlement agreement.

Can I negotiate the terms of my settlement agreement?

Yes, the agreement is voluntary, and you don’t have to accept the original terms offered. You don’t even need to enter discussions if you don’t want to, but if you do, both you and your employer must agree to any changes you propose. You might want to negotiate for a larger payment, especially if you think you’ve been treated unfairly and are agreeing to give up a potentially valuable employment claim. Your adviser will advise you on the terms being offered.

You could also request that the company provides you with an agreed reference, and you can also agree between you how your departure will be announced within the company.

Do I need a solicitor?

A solicitor is essential, because if the agreement is to be legally binding, you as the employee must have received relevant independent advice. The agreement also has to relate to a particular complaint or proceedings, must be in writing, and must identify your adviser.

Most importantly, as you’re renouncing your rights to bring a claim against your employer in relation to the termination of your employment, you need to be absolutely certain that you’re satisfied with the terms of the agreement before you sign. It’s a complex document that covers many areas, and you’ll need advice from an adviser who can explain the effect of the settlement agreement to you – in particular, its effect on your ability to bring a tribunal claim under relevant legislation.

What do the terms ‘without prejudice’ and ‘protected conversation’ mean?

Using the term ‘without prejudice’ can enable you and your employer to have a full and frank discussion without fear of anything being used in court or at a tribunal later on should discussions subsequently break down. Where there isn’t a dispute, your employer could enter into a ‘protected conversation’ regarding the settlement agreement. This is useful as it enables both parties to talk freely – or ‘off the record’ – without the fear of anything they say being later used as evidence against them in an unfair dismissal claim.

Am I allowed to tell others I’m negotiating a settlement agreement?

These agreements often include a confidentiality clause, meaning  you can’t tell anyone that you’re discussing, or have agreed, a settlement agreement. Exceptions to this might include immediate family and – if required by law – HMRC. The confidentiality clause will state exactly what you can disclose; you should discuss this with your solicitor to make sure what’s included is fair and consider any other exceptions you’d like – professionals or recruitment agents, for example. This is particularly important if other people or organisations are aware that you’re in a dispute with your employer or are being made redundant.

Will I have to pay tax on my settlement payment?

In certain circumstances individuals can benefit from a tax-free compensation payment up to the sum of £30,000 and anything over that amount will be subject deductions to income tax. Most settlement payments are covered by the £30,000 exemption. 

Employment payments such as pay in lieu of notice, salary, payment for untaken holiday will be subject to tax and national insurance deductions. 

Taking sound legal advice from employment law solicitors, who will take time to understand your circumstances and know the value of any potential legal claim you may be giving up, can ensure that you come away with the best possible outcome. You will feel informed and fully understand the terms of the agreement and will be assisted to negotiate the best terms. If you’d like to know more, don’t hesitate to get in touch.


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