Settlement Agreement – Been offered one! Is it worth considering?

What is a Settlement Agreement?

A settlement agreement is simply a contract put in place to stop employees from instigating claims against their employers. These can often be referred to as termination agreements, gagging clauses or, with the more colloquial term, ‘a golden goodbye’!

A settlement agreement can be a mutually beneficial way for both the employee and employer to renounce their working relationship without unanticipated recourse.

It will often involve the employee agreeing to waiver rights in terms of bringing any claims against their employer, as well as being a method of resolving any pending court actions or tribunals.

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Is it worth considering a Settlement Agreement?

Every employment case is different, and how you seek to resolve it depends on individual circumstances and your overall intended ideal outcome.

It is always advisable to think about what you want to gain from any negotiations and whether the agreement fully reflects that.

For example, do you want financial compensation, the reinstatement of your role following an unjust dismissal, or a good reference?

Always make sure your goals, intentions and best interests align before signing off on any agreement.

You do not have to accept a settlement agreement from your employer. However, if you are unfamiliar with employment law and negotiations, then it is always advisable to obtain legal advice first.

I have received a Settlement Agreement: What should I do?

Seek Advice

You will need to use the services of an employment solicitor in order to make the settlement agreement legally binding. Often the settlement contract will ask you to confirm whether you have used the services of a legal professional to comprehend the details of what you agree to fully.

Usually, employers will offer payments towards the legal fees in this regard in the ballpark of £200-£500. However, this may not cover the full costs involved.

If you find that your situation is more complex or further negotiations are needed, then it may be worth financing any cost deficits yourself to ensure that you are fully covered. Ensure you have the security that any deal made reflects the best possible outcome.

Make Clear Decisions

You do not have to accept the agreement offered to you. Consequently, there is no guarantee that your employer will return with a more favourable one.

Settlement agreements can be a tactical gamble. If you have been emotionally hurt from events, then it is always worthwhile to ensure that you make any decisions wisely and with a clear head.

Your solicitor will be conversant with how to approach a conciliation. They will take into account aspects such as overall costs and any potential negative publicity that your former employer may want to avoid.

There is no harm in being honest with your solicitor about what you want, but you will likely need to consider a compromise in order to reach the best possible outcome.

Your solicitor should be able to provide you with useful advice and guidance, along with the consequences of accepting or rejecting offers.

Understand Your Agreement

A settlement agreement will often be a lengthy contract, filled with extensive legal jargon and unfamiliar terms. It may seem set out to confuse you.

As this is a legal agreement, specific clauses and terminology are required to safeguard the content of the contract. Again, your solicitor will talk you through the subject matter. Ensure that you are comfortable with your level of understanding before proceeding.

Furthermore, you will find that the contract may mention this arrangement is in a full and final settlement against all future claims that may or may not have even occurred. This is to cover the employer of any possible eventuality and prevent loopholes.

Gagging Orders

Not all employee/employer relationship breakdowns are fractious, but confidentiality clauses are commonplace in settlement agreements to safeguard those involved.

Signing an agreement that involves this clause means that you or your employer are unable to make detrimental or destructive comments relating to the situation, whether the comments reflect the truth or not.

This clause will often prevent you from being able to report malpractice or whistleblowing in the future unless approached to do so by subpoena.

Advisory, Conciliation and Arbitration Service (ACAS)

Aside from a settlement agreement, the only other legal method of an employee waiving or surrendering their employment rights is through a COT3 form. These can only be obtained through ACAS and do not require any intervention by a paid solicitor.

There are more limitations and less overall security in using a COT3 form, which is why a settlement agreement is often a more favourable method of resolution. However, you can obtain more information from ACAS.

Compensation Payments and Tax

Once a settlement agreement has been made; generally, a compensation payment will follow.

When agreeing to your global compensation amount, you may wonder about your tax allowances. Your solicitor will be able to advise you adequately specific to your circumstances.

Simply put, most settlements under £30,000 can be exempt of tax.

However, it is common for employers to use a tax indemnity clause within the settlement agreement. This means, if a tax payment is due on the amount, the employee will be liable for the costs to the HMRC and not the employer.

Settlement Agreement – References

Another matter concerning a settlement agreement, especially where a working relationship has broken down, is with regards to future references.

A settlement agreement can include an arrangement in respect of any references being made by your employer when asked to do so.

Sometimes a standardised reference will be included in the contract itself. However, should a more detailed testimonial be required at a future date, then any reference given should be in line in terms of favourability and content as arranged within the agreement settlement.

If you have been given a settlement agreement, speak to an employment solicitor to make an informed decision.

Related article: Unfair Dismissal: The Ultimate Guide 2020