Tue 25 Apr 2023

Settlement Agreements - what you need to know

It is not every day that you leave a job. In most cases, people leave because they have another job to go to and they are resigning at their own behest. However, what happens if the situation is different - if a departure from work is being driven by an employer and not by the employee?

The fact is that this scenario is more common than you might think. So common that there is a special process for dealing with it which is written into UK legislation. If an employer wishes to have a discussion with an employee about leaving on mutually agreeable terms, without having to jump through all the usual hurdles of discipline/performance management, then they can hold a protected conversation with the employee and offer them a settlement agreement. Using a settlement agreement is also common where employees are being made redundant or if there is a reorganisation.

So what is a settlement agreement?

A settlement agreement is a legally binding agreement whereby the employee agrees to waive their employment rights and settle any potential court or tribunal claims, normally in return for financial compensation. Settlement agreements used to be known as "compromise agreements" - the name changed back in 2013, but they are the same thing.

Why is my employer telling me to speak to a lawyer?

You need to take legal advice on the terms and effect of a settlement agreement, otherwise it will not be effective (in terms of you waiving your rights). As a protective measure, to make sure that employees receive appropriate advice beforeĀ  waiving important employment rights, the legislation specifies that an employee must obtain advice from a relevant independent adviser. Usually, this will be a lawyer.

Usually an employer makes a contribution to the employee's legal fees in recognition that they have to take this advice. This may not cover all of your legal fees, particularly if you want to get into negotiations about what is being offered. The legal fee contribution can sometimes be negotiated upwards.

What should I be looking for in the Agreement?

The settlement agreement will set out the terms under which you will be agreeing to give up your employment rights. It should make clear what payments you will receive. Normally this will include:-

  • salary and benefits to the termination date;
  • notice pay;
  • accrued holiday pay and;
  • a compensation payment, which might include your entitlement to statutory redundancy pay (if applicable).

Settlement agreements often also contain clauses covering future behaviours (on both sides), including:-

  • confidentiality;
  • the giving of references to future potential employers;
  • what statement will be made to colleagues/third parties about your departure;
  • not making derogatory comments about each other and;
  • returning Company property.

Your lawyer will be able to explain the effect of these clauses to you and tell you if the wording is reasonable.

How long do I have to accept the settlement agreement?

Your employer will usually give you a deadline to return the signed settlement agreement to them. Your employer should though give you a reasonable period of time to consider the proposed settlement agreement. How long is reasonable will depend on the circumstances, but as a general rule the ACAS Code of Practice on Settlement Agreements states that you should be given at least 10 days to consider the formal written terms of the agreement and take legal advice.

If you have been given a Settlement Agreement, it is important that you take advice from a lawyer who deals frequently with employment law issues. They will be able to identify, from speaking to you what claims you are likely to have, what the likely award would be if you made a claim rather than entered into a settlement, and whether or not the settlement being proposed is reasonable, or whether you should be looking for a better settlement. You will likely only do this once in your career, and the way your departure is handled might impact on how your departure is perceived by others (and therefore impact on your future employment prospects). It is important to get the right person on your side.

Morton Fraser has a team of employment lawyers based in Edinburgh and Glasgow who frequently deal with settlement agreements. Although we are based in Edinburgh and Glasgow our employment lawyers can advise on settlement agreements irrespective of where you live in the UK. We can meet face to face or via a video call. If you would like more information, please contact our Employment Law team today.

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