What is a Settlement Agreement? Everything You Need to Know

As an employee, being unhappy in your place of work can be an extremely stressful experience, that can affect just about every aspect of your life. While it is important to leave a job where you feel you are being mistreated, it’s also wrong to feel ‘pushed out’ of your employment due to circumstances outside your control.

This is where a settlement agreement can come in. This provides a means for both parties to part ways in a manner that is mutually beneficial – allowing you to move on and make a fresh start.

In this post, we will answer some common questions about settlement agreements.

• What is a settlement agreement?
• Under what circumstances might a settlement be used?
• Can I ask my employer for a settlement agreement?
• What should you do prior to seeking a settlement?
• What happens when an employee asks for a settlement agreement?
• Can you negotiate a settlement agreement?
• What else is likely to be included in the agreement?
• Should I accept the agreement?
• Can a settlement agreement be withdrawn?

What is a settlement agreement?

A settlement agreement is essentially an agreement between an employer and their employee, which settles, the employee’s employment and/or a dispute, and thereby relieves the company of any liability/further legal action.

Examples of a workplace dispute could be when an employee is discriminated against or has their contract of employment breached.

In order to avoid this situation, along with any associated legal costs and any potential damage to the reputation of the employer’s brand, the company might be keen to offer the employee a financial settlement. If they sign the settlement, then they will receive that amount of money but would waive their right to bring a tribunal claim.

Conversely, there does not need to have been a dispute. An employer and employee can have a ‘without prejudice’ conversation. This means any discussions are inadmissible if the employee was to bring a claim. An employer may want to avoid having to deal with a troublesome employee or an employee may want to leave the company on favourable terms before the relationship becomes strained.

Under what circumstances might a settlement be used?

A settlement can be used in any scenario where there is a dispute between an individual and an organization.

A dismissed employee, for example, might feel that their contract was wrongfully terminated and might therefore seek compensation. Similarly, a settlement can be used to settle disputes as to the nature of the work, the use of intellectual property, working conditions, and many similar circumstances. Being moved to a new role that does not fit the original job description is another common cause for a settlement to be sought.

There are technically no limits to what a settlement can cover. In fact, some employees will use settlements simply to handle personality clashes at work. This can be useful if trying to make a clean break when there are unresolvable situations in your workplace.

While a settlement should not be used as a substitute for poor management, many organisations can acknowledge when they have failed a member of staff and will offer a settlement to avoid any bad publicity.

Can I ask my employer for a settlement agreement?

Anyone currently in employment can approach their employer about a settlement agreement. In most cases, it will then be up to the organisation to respond and to make an offer, but there is nothing to stop an employee making the first offer.

That said, it is important to consider the likelihood of success when making this request, as well as the potential repercussions if the request should be denied. These include the loss of alternative options, awkwardness in the workplace, poor references, and a general loss of goodwill.

It is important to think long and hard before deciding if this course of action is right for you. Moreover, you should always take advice on your legal position. Going about this in the right way should allow you to ensure the best possible outcome for all parties, without destroying any goodwill.

What should you do prior to seeking a settlement?

If you plan on seeking a settlement from your employer then, the first step is to do your research and to seek expert advice from a solicitor.

Getting independent legal advice is in fact a legal requirement – until the employee has done so, the settlement agreement will not be binding unless you received independent legal advice before signing.

Getting advice beforehand not only helps you to be certain if you have a case but also to ensure that you go about it in the best possible way to increase your likelihood of a positive outcome. For instance, seemingly small details like knowing how much holiday pay you are entitled to may be pertinent to your case.

Another important step is to gather together all relevant and useful documents, alongside any evidence that will help you to make your case.

What happens when an employee asks for a settlement agreement?

A settlement offer will very often be made in writing, which will outline specifically the terms of the agreement. In some cases, an employee might receive a settlement offer alongside a termination of employment, or in response to a complaint or a request for a settlement. In another scenario, an employee may actively seek the settlement agreement.

The parties may then wish to discuss the offer and the agreement via a ‘without prejudice’ discussion, this means that in most cases, the conversation is inadmissible in litigation.

Having already sought legal advice, you should be well prepared to deal with this situation and to know whether the offer is generous or appropriate.

That said, you should not feel pressured to answer quickly: it is often better to go away and think, and ideally to seek further legal advice. You are under no obligation to answer immediately, and while the employer may be able to withdraw the offer, they most likely will be as eager for a resolution as you are.

Keep in mind that the ACAS Code of Practice on Settlement Agreements recommend that employers provide at least ten days for employees to consider their offer.

Can you negotiate a settlement agreement?

If your employer offers you a settlement, don’t be afraid to make a counteroffer. Employers often leave room within their budget to increase the offer if necessary. This of course means that yes, you certainly can negotiate a settlement agreement.

The key to a good negotiation however is not to try and ‘beat’ the other party, which will only create ill will and make the negotiation considerably more difficult. Instead, you should seek to reach an outcome that everyone is happy with. It will also make it that much easier and faster to come to an agreement.

Consider what is reasonable: What are you giving up? Have you suffered any injury to feelings? How long may it take you to find a new job on a comparable salary? How much can the organisation afford?

One very useful step is to have an idea, in your mind, of how much you would be willing to accept and how much you would ideally aim for. You will likely end up settling somewhere in between.

What else is likely to be included in the agreement?

Many companies will use a template for their settlement agreements, meaning that there may be numerous irrelevant terms included.

You should always read through these with the help of a solicitor nonetheless, as they will be binding if you should sign.

Other clauses that might be included are such things as confidentiality clauses. These ensure that you will not make damaging statements about the company, which is one of the initial motives for the settlement in the first place. Note that this can also cut both ways: an ‘agreed reference’ means that the employer will mutually agree with you the wording of the job reference held on your personnel file after you leave.

Should I accept the agreement?

This is closely tied to the last question. Before considering whether you should accept or reject, you should consider whether there is scope to improve the offer and/or its terms so that they better suit you.

When doing this, it is useful to think about what would happen if you were, or were not, to accept the terms. Not only that, but you should also consider the potential reasons that the employer has to offer you the settlement in the first place. Why did they draw up these terms? 

Things to think about include:

• The strength of your case – would you win at tribunal?
• How much money could you get?
• How good has the company been to you in the past? How is it treating its other employees? Is this a ‘fair’ outcome?
• What else is included in the settlement? Are there any terms you aren’t happy with?

Can a settlement agreement be withdrawn?

The employer maintains the right at all times to withdraw the settlement agreement, up until the point where both parties have signed. This might cause an employee to feel pressured to accept the terms before they are taken ‘off the table’. However, what is important to remember is that the company would not have made this offer if the conditions were not also favourable for them. That is to say, that they are likely as eager for you to sign as you are.

How can Myerson help?

We are experienced in advising employees and senior executives on negotiating mutually agreed exits and reviewing the terms of settlement agreements.

If you need to take legal advice please don’t hesitate to contact our expert employment lawyers on 0161 941 4000 or by email lawyers@myerson.co.uk.