Settlement Agreement FAQs

Facing a settlement agreement can feel overwhelming, especially if it comes at a challenging time in your career. Whether you’re considering an offer or simply want to understand your options, we’re here to help.

Employment settlement agreements are designed to resolve disputes or end employment on agreed terms, but understanding the details is crucial to protecting your rights and achieving the best outcome. Below, our employment specialists have answered the most common questions they’re asked to help guide you through the process and make informed decisions.

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If you need personalised advice or want to discuss your situation in detail, our experienced  Employment Law team at GloverPriest is just a call away. Contact us today.

What is an Employment Settlement Agreement?

An employment (or employee) settlement agreement is a legally binding contract between you and your employer, designed to resolve workplace issues or disputes on agreed terms. 

Under the terms of a settlement agreement, you give up your right to bring any claims against your employer in return for a financial payment (often called a termination payment) or other benefits, such as an agreed reference. Either you or your employer can propose a settlement agreement, making it a flexible way to resolve disputes or part ways amicably.

While settlement agreements can provide clarity and help you move forward, it’s crucial to fully understand the terms before signing. Seeking advice from an experienced solicitor ensures the agreement is fair, your rights are protected, and you’re getting the best possible outcome.

What are the Benefits of Signing a Settlement Agreement?

A settlement agreement can provide a clear, structured way to resolve workplace issues or bring an employment relationship to an end. It allows both parties to move forward on agreed terms, often with benefits for the employee that wouldn’t typically be available.

For employees, a settlement agreement can include:

• Financial Compensation: This may exceed standard entitlements, with payments up to £30,000 often being tax-free.
• A Positive Reference: Many agreements include a guaranteed reference, making it easier to transition into your next role.
• Clarity and Closure: By avoiding the uncertainty, stress, and cost of pursuing a tribunal claim, you can focus on your next steps without the burden of ongoing disputes.

For employers, settlement agreements provide peace of mind, as they prevent potential and future legal claims. They also ensure the terms of departure are settled fairly, minimising disruption and fostering a smoother exit for everyone involved.

Employers will typically contribute to your legal fees, so you can access expert advice to check the agreement protects your interests and represents a fair deal - often without any out-of-pocket expense.

What are the Disadvantages of a Settlement Agreement?

While settlement agreements have their positives, there are some downsides to be aware of.

The most important thing to remember is that by signing, you give up the right to bring certain claims against your employer. If something unexpected comes to light later, you may not be able to take action.

The payment offered might not always reflect what you could potentially receive at a tribunal. Without advice from a solicitor, it’s easy to feel pressured into agreeing to terms that don’t fully suit your situation.

For employers, settlement agreements can be costly because they often include enhanced payments to encourage signing. That said, these costs are usually worth it when compared to the risks and expenses of a tribunal. If the process isn’t handled sensitively, it can also affect relationships with other staff or damage morale.

Having a solicitor on your side can help make sure the agreement is fair, the terms are right for you, and you feel confident about your next steps.

How Much Money Could I Receive Under a Settlement Agreement?

The financial value of a settlement agreement depends on your situation. Payments may include:

• Contractual entitlements, such as salary, notice pay, and payment for accrued but unused holiday.
• Bonuses or commissions, depending on the terms of your employment.
• Statutory entitlements, such as redundancy pay in redundancy situations.

Employers may also offer an ex gratia payment - an additional, tax-free sum to compensate for the loss of your role. This is often the key incentive to sign the agreement, but the amount depends on factors such as:

• The length of your employment.
• Your salary and contractual benefits.
• The strength and potential value of any claims you might bring.
• The employer’s willingness to avoid a tribunal or reputational risks.

For example:

• If you’re being made redundant, your employer may offer enhanced redundancy pay to encourage you to sign.
• If there are allegations of misconduct, your employer might offer a basic reference as part of the agreement to avoid the stress and costs of a tribunal.

Every case is different, so it’s essential to seek advice to ensure the offer reflects your circumstances and potential claims.

Do I Have to Accept the Settlement Agreement I’ve Been Offered?

No, you are certainly not obligated to accept a settlement agreement if you feel the terms are not fair! It’s entirely your choice whether to negotiate for better conditions, reject the offer, or walk away entirely. 

However, it’s important to consider the potential implications. For example, your employer may still be able to dismiss you fairly depending on the circumstances, and rejecting the agreement doesn’t guarantee you’ll receive a better offer later. Pursuing a claim instead could involve legal costs, time, and stress. 

Additionally, your employer’s contribution to your legal fees typically applies only if you sign the agreement, meaning you might have to cover these costs yourself if you decline. 

Seeking legal advice early is essential, as your solicitor can help you weigh up your options, understand the risks, and make the best decision for your situation.

Do You Pay Tax on a Settlement Agreement?

Not all payments within a settlement agreement are taxed. For example:

• Compensation payments up to £30,000 are generally tax-free (though this may depend on how the settlement agreement is drawn up, making support from your solicitor even more vital).
• Notice pay, wages, and holiday pay are subject to income tax and National Insurance.

It’s vital to understand how the payment is structured, as this affects your final sum. A solicitor can review the terms to ensure you’re not caught out by unexpected tax liabilities.

How Can I Get Settlement Agreement Advice?

You’re legally required to receive independent legal advice before signing a settlement agreement, whether that’s from an experienced solicitor, union representative or other authortised body. This ensures you understand what you’re agreeing to, including any rights you’re giving up.

Most employers offer to contribute towards your legal fees, making it easier for you to access expert advice. At GloverPriest, we’ll guide you through the process, explain your rights, and help you negotiate terms that work in your favour.

Do I Need a Solicitor for a Settlement Agreement?

To make a settlement agreement legally binding, you must get independent legal advice from a qualified adviser. Most often, this will be from a qualified solicitor, but it could also be a trade union representative or an authorised advice worker. The purpose of this advice is to ensure you understand the terms of the agreement, including the rights you’re waiving by signing it.

It’s important to note that this advice is typically limited to the legal implications of the agreement, rather than whether the terms are favourable or if you could achieve a better outcome through a tribunal. However, a solicitor can also help you negotiate better terms, ensuring the agreement works in your favour.

In most cases, your employer will contribute towards the cost of this legal advice, meaning you can access the support you need without worrying about the expense.

Settlement Agreement Solicitors - How GloverPriest Can Help

At GloverPriest, we’re here to make your settlement agreement straightforward and stress-free. Whether you’re considering an offer, need help negotiating better terms, or want clarity on what the agreement means for you, our experienced solicitors are on hand to help.

Get in touch today to speak with a member of our helpful Employment Law team. We’ll ensure you have the information and support you need to move forward with confidence.