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Being offered a settlement agreement by your employer can feel unsettling, particularly if you are facing dismissal, being made redundant or are involved in a dispute. However, a settlement agreement can provide a clean and easy exit from an employment relationship, securing financial compensation and protecting your future. Understanding how the process works and when to take legal advice can make a real difference to the result.
What is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employee and an employer. Most commonly they are used to bring employment to a formal end although they can also be used to settle a dispute when employment continues. Once you sign an agreement, you generally waive your right to bring any future claims against your former employer — including claims for unfair dismissal, constructive dismissal, personal injury or discrimination.
Because the consequences are significant, there is a legal requirement to seek independent legal advice before signing. Without independent legal advice, a settlement agreement has no legal effect. Your employer will almost always offer a financial contribution towards your legal costs to meet this requirement.
When Do Negotiations Take Place?
Settlement discussions take place in a number of situations. Dealing with grievances can take significant time and management resource, and an employer is likely to prefer a confidential, clean exit over a protracted dispute. Common scenarios include:
- Where the employment relationship has irretrievably broken down
- During a redundancy or restructuring process
- Following a grievance, disciplinary, or performance management process
- Where the employer wants to avoid the cost and reputational risk of an employment tribunal claim
- Where the employer may have acted unlawfully and wants to limit potential claims
It may be possible to negotiate a higher compensatory figure than is being offered and also to include nonfinancial benefits.
Four Steps You Can Take
1. Seek Independent Legal Advice Before Signing
Before you engage in any settlement agreement negotiations with your employer, you must seek independent legal advice. This is not merely a legal requirement to seek independent legal advice before signing — it is the most effective way to understand the practical implications of the terms on offer. A specialist employment solicitor will review the agreement, advise on whether the financial compensation is fair, and identify any terms that may negatively impact your negotiating position or your future employment prospects.
2. Assess Your Negotiating Position
Depending on the strength of your potential claim, your negotiating position will vary. If you have a strong unfair dismissal or constructive dismissal claim, an employer may be more motivated to improve their offer. If you have less than two years’ service, and resign or are dismissed on standard grounds then although that it is unlikely that you would succeed in an Employment Tribunal claim your employer may offer a settlement agreement to avoid, for example, a SAR or grievance.— but even without the two years’ service required for unfair dismissal, claims for discrimination, whistleblowing, or automatic dismissal can carry significant value and you still seek legal advice.
Our team can help you better understand what you might realistically get in an employment tribunal, so you can judge whether the terms on offer represent genuine value or whether further negotiation is warranted. An employment tribunal is unlikely to be quicker or cheaper than a well-negotiated settlement, which is why understanding your position before negotiations begin is essential.
3. Should You Accept the First Offer?
The employer’s first offer may not be their the final offer. Steps we can take to get a better deal include:
- Requesting an increase in the financial settlement figure
- Minimising any restrictions, such as restrictive covenants, that could limit your future employment
- Negotiating the wording of any reference from your former employer
- Ensuring notice pay, holiday pay, and any bonus entitlements form part of the settlement
- Checking whether payments can be structured to minimise your tax liability
4. Considering Your Employer’s Perspective
To achieve a good settlement, it helps to consider negotiations from your employer’s position. An employer will almost always prefer a confidential agreement to keep the dispute out of the public domain and to avoid the legal costs of a tribunal claim. If you are in a position to credibly threaten an unfair dismissal claim or discrimination complaint, the employer is more likely to offer a settlement agreement. Knowing this can help us negotiate a more beneficial settlement.
What Can You Negotiate as Part of the Settlement?
Many employees focus solely on the financial compensation figure, but there are several important aspects of settlement agreements worth negotiating:
- The settlement amount — a settlement that is in excess of your statutory entitlements should always be your goal
- Restrictive covenants — minimising any restrictions that could affect your ability to work in your sector
- Reference wording — agreeing a favourable agreed reference from your former employer
- Confidentiality obligations — the agreement to keep terms confidential is standard, but the scope should be reviewed carefully
- Indemnity provisions — protecting you from any claims relating to a settlement agreement made after it is signed
- Tax treatment — structuring payments correctly to reduce your liability
Every negotiation is different, and the practical implications of the terms will depend on your specific circumstances. We can walk you through each aspect of settlement agreements and advise you on where to push and where to accept.Whether you have been offered a settlement agreement unexpectedly or are already in settlement discussions, our expert solicitors will guide you through every stage of the agreement process, from the initial offer through to achieving the settlement you deserve.
We also advise on related employment matters, including unfair dismissal, constructive dismissal, discrimination, whistleblowing and Acas early conciliation, which can provide an alternative route to resolving a dispute with your employer before a tribunal claim becomes necessary.
Ready to negotiate a settlement agreement?
Contact Duncan Lewis today to speak with an expert settlement agreement solicitor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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