3 things you need to know about settlement agreements

3 things you need to know about settlement agreements

You may have been asked to have a protected conversation or a without prejudice conversation by your employer, in other words, an “off the record” discussion about your employment. Such a discussion would normally involve you agreeing to enter into a settlement agreement.

(1)  What is a settlement agreement?

A settlement agreement (formerly known as compromise agreements) is a legally binding document that is for your employer’s benefit and not yours. The purpose of the settlement agreement is to prevent you from pursuing any civil claim or employment tribunal claim.

Your employer will most probably pay you compensation to prevent you from pursuing all claims that you have or may have against your employer. This payment may be expressed as tax-free. However, it is likely the settlement agreement will include a tax indemnity clause, which will mean if HM Revenue & Customs don’t believe the payment was genuinely for what it is expressed to be paid for, you will have to pay your employer for the income tax and employee national insurance contributions. You may also be liable for penalties, costs and interest too.

Most settlement agreements are drafted in a way that are not necessarily straight-forward and the terms are usually in favour of your employer. There expert legal advice from specialist employment lawyers is vital.

For a settlement agreement to be legally binding, you must take legal advice on the terms and effect of the agreement.

As a general rule, the Acas Code of Practice on Settlement Agreements provides for a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless you agree otherwise.

(2)  Do you have to accept the terms of a settlement agreement?

In short no! Depending on the facts, you may be able to negotiate better terms, including higher compensation. However, it vital you seek specialist legal advice as early as possible. Some lawyers will simply “rubber stamp” a settlement agreement rather than positively advice you on the terms. Marjon Law will advise you on whether you have been offered a good deal and if the terms of the settlement agreement are fair and reasonable. 

In some cases, the compensation payment and/or the terms of a settlement agreement may not be reasonable. You will then be able to negotiate what your employer has offered you and if your employer refuses to be reasonable, you may be able (depending on the facts) to bring an employment tribunal claim.

Your employer cannot put undue pressure on you to agree a settlement agreement. This would be “improper behaviour” by your employer and could lead to the settlement agreement being overturned later (eg your employer says to you before disciplinary proceedings have begun that you will be dismissed if you don’t accept the offer). Improper behaviour also includes:

• all forms of bullying, harassment and intimidation
• physical assault or the threat of physical assault and other criminal behaviour
• all forms of victimisation
• discrimination because of age, sex, race, disability, sexual orientation, religion or belief, gender reassignment, pregnancy and maternity, and marriage or civil partnership.

Where you employer is making many redundancies, and employee representatives are involved, the compensation and the terms of the settlement agreement may have already been agreed and you may be stuck with both. Therefore, you should speak to employee representative (or if you are an employee representative) ensure that you contact a specialist employment lawyer who can seek to agree the terms of the settlement agreement with your employer and then act for all the employees that have been impacted by redundancy. Many employees like this, as they prefer to deal with one lawyer rather than many different ones. Marjon Law is experienced in assisting multiple employees at the same time and ensuring that they receive a settlement agreement with fair and reasonable terms.

(3)  What are the benefits of you signing a settlement agreement?

Where a termination of employment is involved, a settlement agreement offers the benefit of certainty and a clean break between you and your employer.

You will have the security of a written agreement setting out what you will receive eg compensation and reference, what you can do, and what your employer can do after the settlement agreement has been signed. If you employer fails to comply with the terms of the settlement agreement, you will be able to bring a claim for breach of contract.

Although, there may be provisions in a settlement agreement, that prevent you from doing and saying certain things, you will not be prevented from:

• reporting an offence (eg discrimination or sexual harassment) to the police
• reporting discrimination or harassment to your employer
• making a protected disclosure under whistleblowing law – for further information see our specific page on whistleblowing
• reporting misconduct to a professional body or regulator
• cooperating with and giving evidence in connection with a criminal or regulatory investigation
• disclosing information to the tax authorities in connection with tax-related matters
• seeking legal, medical or other professional advice
• disclosing any information which you are legally required to disclose
• disclosing or reporting discrimination or harassment which has not happened yet.

If the above provisions exist in a settlement agreement, this part of the agreement will not be enforceable.