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Beginner’s guide to settlement agreements

In this article, we take a look at a number of issues that beginners to settlement agreements (generally, employees who have been offered a settlement agreement by their employer) may face when they’re considering taking the first steps with their agreement.

  1. What settlement agreements are
  2. When settlement agreements are used
  3. Why settlement agreements are used
  4. How much it will cost to get advice on your settlement agreement
  5. What value you should expect the settlement agreement to be
  6. What clauses you can expect in a settlement agreement
  7. What pitfalls there are with settlement agreements
  8. Who you should obtain advice from on a settlement agreement
  9. Myths & misconceptions about settlement agreements

1. What settlement agreements are

Settlement agreements are statutorily-regulated contracts to settle existing or potential legal disputes in the civil courts or the Employment Tribunal between an employer and an existing or former employee. In return for the payment of some form of benefit (normally a financial sum and, often, the provision of a written reference) the employee agrees not to bring proceedings against their (former) employer in the civil courts or the Employment Tribunal.

2. When settlement agreements are used

Settlement agreements can be used in a variety of situations where an employee could potentially exercise their legal rights and pursue their employer – for example, if the employee believes that they have been racially discriminated against by their employer then they may choose to sue their employer for race discrimination. However, settlement agreements are most common in the following types of situations:

  1. Redundancies
  2. Mutual terminations
  3. Disciplinaries
  4. Grievances

3. Why settlement agreements are used

Settlement agreements are used to settle potential employment disputes and prevent litigation between an employer and an employee.

Benefits to the employer:

  • Finality as to litigation
  • Certainty as to potential liabilities

Benefits to the employee:

  • (Normally) the payment of a sum of money to compensate the employee for the rights they have waived
  • The provision of a written reference (if applicable)
  • Avoiding the necessity of going to the Employment Tribunal to enforce their rights

4. The cost of obtaining advice on your settlement agreement

Your settlement agreement will almost always specify a figure (normally between £300 and £500 plus VAT) that your employer is willing to contribute towards the cost of your obtaining legal advice on your settlement agreement. If you’re happy with your settlement agreement then the cost of obtaining legal advice shouldn’t be more (or much more) than the figure that your employer has stated they will cover. If you’re not happy with your settlement agreement and want to negotiate with your employer then it may cost you a bit more than the figure that your employer is willing to cover. However, the best thing to do is to obtain quotes from a number of specialist employment solicitors to see what the best quote for legal advice on your settlement agreement will be.

5. What value should you expect the settlement agreement to be?

This really depends on a number of things:

  1. The strength of your potential claims – if you have strong claims in the Employment Tribunal or civil courts then your employer may be more willing to negotiate with you if you’re pressing for a higher settlement payment.
  2. Your willingness to litigate – if you’re ready and willing to litigate (and have the time and resources to do so) then you can afford to be a bit more aggressive in your negotiations. If you don’t wish to litigate then you will have to be a bit more careful in your approach to the negotiations as an overly-aggressive stance could cause the settlement agreement to be withdrawn entirely
  3. The attitude of your employer – if your employer is amenable to the idea of negotiating and you have good existing relationships with management at the business then you stand a better chance of negotiating a higher payment than if the reverse was true.
  4. Your employer’s budget – if your employer has relatively large financial resources then they may be more open to the idea of negotiating your settlement package – or more so than if they have a constrained budget.

6. What clauses can you expect in a settlement agreement?

You should read this article for a more comprehensive run-through of what clauses you should expect in a settlement agreement.

However, you can expect the following types of clauses in most settlement agreements:

  1. Payment in Lieu of Notice (PILON) clause
  2. Payment clause
  3. Tax indemnity clause
  4. Waiver clause (a clause waiving liability)
  5. A clause regarding warranties that the employee is giving
  6. A clause regarding warranties that the employer is giving
  7. A confidentiality clause
  8. A clause regarding your independent legal adviser
  9. Entire Agreement clause
  10. Miscellaneous clause (jurisdiction, rights of third parties etc.)

7. What pitfalls are there with settlement agreements?

There is a good article here on the potential pitfalls of settlement agreements.

You should be wary of the following types of potential pitfalls (among others):

  1. Not considering all potential Employment Tribunal claims that you could have against your employer
  2. Not negotiating a high enough payment for your settlement agreement
  3. Paying too much tax on the settlement sum in the settlement agreement
  4. Failing to take the payment under your settlement agreement in a lump sum
  5. Not including everything you want in the settlement agreement
  6. Obtaining a new job before your settlement agreement is signed and returned
  7. Agreeing to a confidentiality clause that is too broad
  8. Not including a suitable reference in your settlement agreement
  9. Agreeing to extra restrictive covenants in your settlement agreement
  10. Not taking expert legal advice on your agreement

The pitfalls that you could potentially cover in settlement agreements are covered in this article.

8. Who should you obtain advice from on a settlement agreement?

You should obtain advice from an ‘independent legal adviser’ – this is normally a solicitor, a barrister, a trade union official, or another suitably qualified person (you can read an article on who can constitute an ‘independent legal adviser’ here). Take the time to question your legal adviser on their qualifications and experience and find out from them what you should expect from your settlement agreement. Also take the time at the first opportunity to tell your legal representative exactly what issues you have with the agreement and what you expect to receive from the settlement agreement. Your adviser will tell you whether your expectations are reasonable or not and will discuss the next steps with you.

9. Myths & misconceptions about settlement agreements

  1. It’s easy to negotiate a higher package for your settlement agreement
  2. That you’re legally entitled to a reference
  3. That it’s too expensive to obtain legal advice on your settlement agreement
  4. That you can sign your settlement agreement without having to go to a lawyer
  5. That settlement agreement contains ‘gagging clauses’
  6. That you have to compromise every single claim you could have against your employer
  7. That the restrictive covenants in your contract of employment or settlement agreement are ‘water-tight’
  8. That you can’t tell anyone about your settlement agreement
  9. That the first £30,000 of the settlement agreement payment is always tax free
  10. That you always have to work your notice period

You can read an article on 10 common myths and misconceptions with settlement agreements here.

IMPORTANT: The contents of this page are general guidance only and should not therefore be regarded as constituting legal or other advice.