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Top tips: What you need to know before you sign a settlement agreement

Losing your job often goes hand in hand with being asked to sign a settlement agreement – a legally binding document recording your confirmation you won’t pursue a claim against your employer in return for an agreed sum of compensation.

The aim is to try to avoid ending up at an Employment Tribunal – a costly, time consuming and often extremely stressful way of resolving problems.

Settlement agreements are entirely voluntary and you can, if you want, refuse to enter into any discussions at all.

But if you think signing a settlement agreement is in your best interests, it’s important to remember it is negotiable and it may well be that you can improve on the initial terms being offered.

Take your time

The ACAS Code of Practice on Settlement Agreements recommends employers give employees at least ten days to consider a settlement agreement. This is not actually enshrined in employment law, but it is considered good practice and something employers should allow.

If you are feeling pressured, ask your employer for a few days to think about the offer being put to you in the settlement agreement. This also gives you an opportunity to take some legal advice.

Legal Advice

It can be tempting to try to negotiate the details of your settlement agreement with your employer yourself before talking to a solicitor.

This can potentially put you at a disadvantage because although the law requires you to get independent legal advice before signing a settlement agreement, if you’ve already agreed on its terms with your employer it will be more difficult to improve on them later.

A specialist solicitor will be able to tell you whether you have any prospect of a successful Employment Tribunal case against your employer, and what the value of this might be.

They may also be able to help you negotiate higher compensation on the basis of things an Employment Tribunal are unlikely to take into consideration, including:

  • How much you have contributed to the business;
  • The difficult situation you are now in as a result of losing your job;
  • Any sacrifices you have made along the way to help the business.

Although not a legal requirement, most employers will make a financial contribution towards the cost of your legal advice – usually between £350 and £750 plus VAT. If it’s not on offer, then ask.

It’s not all about the money

It’s important to remember that although the financial settlement is important, it’s not the only aspect to consider. Negotiating a settlement agreement can also give you the opportunity to ask for other things which may be of huge benefit to you going forward.

Examples of these include:

  • Agreeing an excellent reference and having this annexed to your settlement agreement ensuring your employer is under a legal obligation to provide it when asked;
  • Being released from restrictive clauses on working for a competitor via a specific clause inserted in the settlement agreement;
  • Asking for help and support in finding another job – interview and CV skills, for example – and for conformation of this to be written into the agreement;
  • Being able to continue to use your company car for an agreed period.

And don’t forget…

With so much going on at a stressful time, it’s easy to forget about things like making sure you are paid for any statutory holiday you haven’t taken and any benefits you might be entitled to under your contract of employment – like pension contributions and private healthcare.

You might also want to talk about the details of your notice period. Many people assume the only option is to work it out in full but it may be possible to finish earlier and be paid in lieu of notice or to go on ‘garden leave’.

A word about tax…

In April 2018, the law relating to tax on notice periods changed. Please see our earlier blog by clicking here.

It’s important that your settlement agreement identifies the sum that would have been earned had you served your notice in full and states that this is subject to tax and National Insurance.

Not sorting this out properly could cause potential tax problems for both you and your employer so it’s an important one to get right.

For help and guidance about a settlement agreement, please contact any one of our 11 local offices and ask to talk to one of our Employment Law legal specialists.

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