What is a Settlement Agreement and how does it work?
A Settlement Agreement, formerly known as a Compromise Agreement, is a legally binding document in which you waive your right to bring certain claims against your employer. In return for this the employer usually offers a financial inducement, such as an enhanced redundancy payment, to the employee. They are generally used on the termination of employment but can be also used to settle any dispute that you are having with your employer.
Why have I been given a Settlement Agreement?
Settlement Agreement offers both parties a method for settling disputes without going to the Employment Tribunal, but often they are used where there is no dispute to ensure there is a clean break between the parties. There are many reasons why your employer may have given you a Settlement Agreement and a member of our employment team would be happy to discuss your particular circumstances with you.
What should I do if I receive a verbal offer from my employer?
If you have received an offer from your employer you should not delay in seeking the independent advice that you need. A solicitor can help you to fully understand the terms of the offer so that you can make an informed decision as to how to proceed. In most cases your options will include the following:
- accept the offer and sign the Settlement Agreement
- reject the offer and take no other action. The consequences of this will depend on your employer’s motivations for offering you a Settlement Agreement and can be discussed with your solicitor
- reject the offer and negotiate an alternative offer; or
- reject the offer and, if appropriate, make a claim against your employer in the Employment Tribunal or Courts.
How long can I consider an offer for?
The ACAS Code of Practice recommends that your employer gives you a minimum of ten calendar days to consider the offer, however a lesser period can be reasonable in individual circumstances. Regardless, you should not delay in acting once your employer has approached you with an offer for a Settlement Agreement.
How do I know that my employer’s offer is fair?
Whether or not your employer’s offer is fair will depend on the reasons for offering you a Settlement Agreement. If you would have a strong case at tribunal, you should compare the amount that you are being offered against any award that could be made in your favour if you won at tribunal.
If it seems to you and your solicitor that the offer is unfair, you can instruct your solicitor to negotiate a better offer on your behalf or you can refuse to sign the Settlement Agreement.
Can I agree a job reference as part of the Settlement Agreement?
An employer is under no obligation to provide you with a job reference for a future employer. Therefore, if you have been in a dispute with your employer it is a good idea to consider agreeing a reference to be attached to your Settlement Agreement. One of our Employment Team would be happy to assist you in negotiating a reference with your employer.
What happens if I do not sign the Settlement Agreement?
Your solicitor can only help you to understand the Agreement but it is ultimately up to you whether or not you sign the Settlement Agreement. If you decide not to sign the Agreement it is unlikely that your employer will cover your solicitor’s costs.
Should you decide not to sign the Settlement Agreement, you may wish to take your employer to the Employment Tribunal. It is important to be aware that you usually only have three months from termination of employment or from the problem arising to bring a claim.
Can I change my mind once I have signed a Settlement Agreement?
A validly signed Settlement Agreement is a legally binding document and you cannot change your mind once you have accepted and signed the Agreement. For this reason, it is vital that you fully understand the terms prior to signing a Settlement Agreement.
If you have reason to believe that a Settlement Agreement that you have signed is invalid, a member of our Employment Team would be happy to discuss your matter with you.
Why do I need a solicitor?
Settlement Agreements must meet certain requirements in order to be legally binding. One of these requirements is that an employee should be given independent legal advice on the terms of the Settlement Agreement. A solicitor is one type of independent advisor legally permitted to advise on Settlement Agreements and will be able to explain the terms and effects of the Agreement to you.
The solicitor is there to advise you and is not instructed by your employer. Even if your employer has recommended a particular solicitor, the solicitor is independent and will act in your best interests. They will be able to advise you on the implications of accepting or not accepting the Agreement and help you to understand the offer being made.
Who pays the solicitor?
Your employer will usually make a contribution towards the solicitor’s fee and they will tell you in advance the amount that they are prepared to contribute. In most cases, the contribution will cover the solicitor’s costs and the employee will not be required to pay anything.
However, your employer may not contribute where you decide not to sign the Settlement Agreement and the costs will be payable by you. If you require additional work, such as negotiations with your employer or advice on the merits of the Settlement Agreement, the solicitor’s costs may not be entirely covered by your employer’s contribution.
Is tax payable on my compensation?
Some elements of the payments due to you may be taxable, depending on the circumstances of your case and certain terms in your employment contract. The solicitor will advise you on the tax implications of your settlement, and whether it would be in your interests to seek further advice on tax planning from a tax expert before signing the agreement.