Settlement agreements: what do employees need to know?

If your employer offers you a Settlement Agreement, deciding whether to accept can be daunting. Ashtons offer some practical advice to consider.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding agreement, usually entered into on the termination of employment, between an employer and employee. Under the agreement, the employee will settle any potential claims arising from their employment and its termination whereas the employer will promise to provide certain benefits to the employee, most commonly a financial package.

Why are Settlement Agreements used?

There can be benefits to both the employer and the employee in entering into a settlement agreement. First and foremost, it is certainty.

You may be unhappy with the way your employer has treated you or have other grievances against them which may give rise to a claim. Under a Settlement Agreement, you don’t have to prove any wrongdoing to receive your compensation payment so you have certainty of how much you will receive.

The employer can also use the certainty of the costs involve to manage their finances, knowing that they do not need to spend management time and legal costs in defending a claim.

The payment can also benefit from a £30,000 tax-free exemption, so the termination payment up to this amount should be paid without any income tax of national insurance contributions being deducted from it.

In essence, a Settlement Agreement should be an absolute clean break for both parties who can then look forward to furthering their career or business plan.

How much should you be paid?

This depends very much on your situation and is your decision to make rather than ours. However, we can discuss your alternative options and so you can make an informed decision and weigh up whether the settlement agreement is a good way for you to proceed.

If the amount on offer is not acceptable, then we can also negotiate an increase with you in the hope of reach a more attractive package.

Why do you need to see a solicitor?

Settlement Agreements are only valid if the employee has taken ‘independent legal advice’ from an insured solicitor such as ourselves. This means the employee’s solicitor must not have acted for the employer in the past and has only the employee’s best interests in mind. This ensures a full understanding of the agreement which can otherwise be confusing.

We are able to act for employees as an independent adviser and sign the appropriate certificate.

How is the solicitor paid?

It is normal for the employer to make a contribution to a solicitor’s legal costs. The levels of contribution vary depending on the complexity and work involved.

Ashtons will set out a fixed fee for advising on the agreement offered to you and arranging for it to be signed by your employer. Our fees for this are usually within the employer’s contribution.

If you do require any negotiation then you are in the driving seat, allowing you to decide whether the possible cost is worth the possible reward of negotiating a better overall package. If we do incur fees in excess of the employer’s contribution then we will ask the employer to pay these first, but this cannot be guaranteed.

What happens if you don’t sign the Settlement Agreement?

In many cases you will remain employed and the employer will usually revert to another process. Depending on the situation, this might be a redundancy consultation, a performance management process, or a disciplinary investigation.

If you are dismissed, you may try to bring a claim against your employer. This will usually mean you could receive larger compensation overall however you would have to go through the tribunal process to win it. The tribunal system is currently inundated with claims (September 2018) and it is taking in excess of six months to deal with even the most routine of cases. You also risk your claim being unsuccessful in which case you would receive no compensation at all.

Contact our HR Consultants today

If you need specific advice or would like further information, please get in touch with our specialist team by filling out our online enquiry form or by calling 0333 222 0989.