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How Does a Settlement Agreement Work
How Does a Settlement Agreement Work?

Read Employment Law specialist, Paul McAleavey's short guide on Settlement Agreements (formerly known as Compromise Agreements).

What is a settlement agreement?

A settlement agreement is a legally binding contract between you and your employer. Under it, your employment ends and you get an agreed sum of money. In return, your employer knows that you then cannot bring any claims against it in an employment tribunal about your employment or how it ended (for example, for unfair dismissal).

Generally speaking, once you have signed the settlement agreement, you can only sue your former employer if they breach the settlement agreement (for example, by not paying you the agreed sum), if there is a problem with accrued pension rights or if they have caused you a personal injury that you’re not yet aware of.

Why might my employer ask me to sign one?

There are a variety of reasons. Settlement agreements are often offered where your employer:

  • wants to avoid the time that a performance management process or disciplinary process would take;
  • is concerned that you might have a valid claim against it and therefore to avoid any further dispute with you, wishes to resolve matters via a settlement agreement (see section Is the settlement payment my employer offering me reasonable? below); or
  • is making a large number of redundancies and wants to avoid the time and effort of running multiple consultation processes with a large number of staff.

Why do I need to get advised on it by a solicitor? How much will that advice cost?

Unlike many contracts you sign in life, the settlement agreement is not legally binding unless you’ve been told what its legal effect is by a solicitor or qualified trade union representative who is independent of your employer. Before Girlings Solicitors acts for you we will check that we do not act for your employer, so you can be assured that we are completely independent of them.

Your employer should pay all of the legal fees involved in you getting that advice - Girlings will always try to ensure that your employer does this so that wherever possible you do not have to pay us a penny.

What should I be paid?

A settlement agreement will usually set out a number of different payments for you.

  • Your notice payment

If you’re not working your notice period, normally you’re entitled to be paid in lieu of this. Girlings will check that your notice period is being honoured and you’re being paid the correct sums for that period.

  • Bonus or commission payments

If these sums are due, Girlings will ensure your right to get them is protected in your settlement agreement. While many bonus schemes are discretionary, there can often be scope to negotiate with your employer for a partial bonus to reflect the part of the bonus year you have worked. Much depends upon the history of your bonus awards and this is something Girlings will advise you on.

  • Pension contributions

This is an important and often overlooked payment. Unless your employment contract says something to the contrary, pension contributions should be made during or for your notice period. Girlings will also discuss with you whether you should be allocating any sums to your pension to maximise the overall tax efficiency of the deal.

Is the settlement payment my employer offering me reasonable?

The settlement payment is a very important aspect of your settlement agreement, especially as the first £30,000 of it can usually be paid to you tax-free. The amount your employer offers you is often dictated by the circumstances of your potential dismissal, the strength of your case, your length of service and your salary. Girlings will help you understand what your deal works out as on an after-tax basis and whether it is a good deal when contrasted with your legal rights.

We are used to negotiating with employers to obtain better than expected settlement payments for employees and can talk through the options for this with you.

Can I ask my employer to give me a settlement agreement?

Yes, this is possible, but it is vital you do so in a manner that does not prejudice your position. Employees can instigate a "protected conversation" with their employer where an off-the-record conversation can be held about a potential agreed termination of employment, but this conversation must be instigated and conducted in a particular way, which Girlings can advise you on.

I don’t want my employer to bad-mouth me after I leave. Can I agree a reference with them?

Agreed references are common in settlement agreements. You may also wish to discuss a bespoke announcement about your departure that could be shared with colleagues within the business and even clients and stakeholders, so question marks are not raised about the termination of your employment.

What about post-termination restrictions?

Your settlement agreement commonly requires you to commit to comply with any post-termination restrictions in your employment contract. You may not be aware of the extent of your restrictions, which can limit your ability to find new work or deal with certain clients for a period of time. It is possible to seek a relaxation of some restrictions via a settlement agreement and this is something Girlings will discuss with you.

What else should I consider before signing a settlement agreement?

We commonly negotiate and achieve the following outcomes for employees offered settlement agreements:

  • Extensions of private medical insurance cover to allow ongoing treatment to continue or forthcoming surgery to take place - especially important in cases of ongoing mental health treatment;
  • The ability to use/exploit some of the material you worked on during your employment - such as images of projects you worked on as a “portfolio” to help you get a new job.
  • Agreed announcements so you can ensure the news of your departure is managed carefully in a way that protects your professional reputation.
  • Paid time off during any time being spent on garden leave to go to job interviews.
  • Funded outplacement support.
  • Keeping certain items - for example, your work lap top computer, or you may need to negotiate taking your mobile phone number or certain clients with you to your new employer.
  • Mutual non-disparagement obligations.

Experienced Settlement Agreement Solicitors

Our aim at Girlings is to make your settlement agreement process as stress-free and easy-to-understand as possible – getting the best deal for you with the minimum of legal spend for you.

For further information on Settlement Agreements and other employment law issues, please contact a member of the Employment Law team.

Girlings has offices in Ashford, Canterbury and Herne Bay.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

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Our Experts

Carl Vincent

Chairman, Head of Department
Employment Law

Paul McAleavey

Employment Law

David Morgan

Employment law

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