Settlement agreements: what do employees need to know?

If your employer offers you a settlement agreement, deciding whether you should accept it can be pretty daunting.

Settlement agreements are typically given to employees when they are being made redundant. The documents outline the terms of the deal: usually an employee is given money in return for certain conditions, such as not bringing a claim against their employer. It’s a final sign-off before your employment is terminated.

Settlement agreements are also offered to employees if an employer thinks they are performing badly in their job or are guilty of misconduct. In some cases, an employee will be aware that their boss is unhappy, while for others, being offered a settlement agreement can come as a shock.

When you sign a settlement agreement, your employment is terminated. You’ll typically receive a sum of money in return for losing your job and certain employment rights.

If you refuse to sign, however, you may well face a disciplinary procedure or a redundancy situation.

Either way, it’s often a stressful experience. So, here are the main things to consider before you make your decision.

What is a settlement agreement?

Settlement agreements came into force on 29 July 2013, as part of wider government changes to employment laws.

They’re legally binding agreements that set out the full terms of a settlement between an employer and an employee. Each settlement agreement will vary but usually the documents include clauses that deal with: the claims to be settled; the payments you will receive and the relevant tax issues; a confidentially/gagging clause (so you can’t bad mouth your employer) and any agreed reference from your employer.

What’s new?

While settlement agreements are essentially a rebranding of compromise agreements, the new bit is that when you’re given one, your employer is likely to have a pre-termination negotiation with you too.

Pre-termination negotiations – also known as a protected conversations – have come into force as a way of encouraging employers to have frank conversations with employees about terminating their contracts. Anything that’s said in this discussion is protected and cannot be used by either party against the other in an unfair dismissal claim.

The catch is that there are exceptions: the conversation is not protected by the new laws, in discrimination cases, whistleblowing or other automatically unfair dismissal claims. This means that the negotiations no longer have to remain off-the-record if either party behaves badly during the process. So, in these cases, what was said during the protected conversation could come out into the open.

In practice, the pre-termination negotiations may lead to more employers having conversations about termination, and offering settlement agreements, which the employee feels under pressure to accept.


Get advice

The next thing you need is some decent advice. An employer will usually pay the legal costs for you to see a solicitor or qualified adviser.

It’s a legal requirement that you get advice from a qualified professional. “A settlement agreement will only become binding once you have received independent legal advice on it.

An employment solicitor can help you consider whether you’re getting a good deal and whether you have any grounds for a claim against your employer – such as discrimination or unfair dismissal. To decide whether an agreement is a good deal, you need to consider why you’re being offered the agreement and what rights you are being asked to waive as a result of you signing.