Problems at work (home life)

Negotiating settlement agreements

Written by Robert Whitaker on 31st January 2023 | 18 minute read

If you have been offered a settlement agreement it’s essential to get expert legal advice and quickly. You may be facing the prospect of having to leave your job through:

redundancy
having been unfairly dismissed
having been discriminated against
finding yourself in a dispute with your employer.

You will want your lawyer to reach a deal with your employer which is right for you. The deal should look after your financial interests and your reputation. In this article we look at what you can expect during the process.

What is a settlement agreement?

It's a legal document which sets out the full terms of a settlement between an employer and employee. They used to be known as compromise agreements. A settlement agreement can be offered when things aren’t working out between employer and employee and everyone agrees it is for the best to reach a deal. The terms of the settlement agreement should be agreed by both you and your employer. It's important to know that the way the agreement works, is that you are signing away your rights to bring a claim against your employer in the future.

Why use a settlement agreements solicitor?

Settlement agreements are a good way of making sure that employer/employee disputes are sorted out without anyone starting legal action, which can be stressful and expensive. If you are discussing a settlement agreement with your employer, you are required to obtain independent legal advice as part of the legal formalities - so it's not something you choose to do or not do. Your solicitor will be able to advise you on your rights and help you decide whether to take the deal offered to you by your employer. They will also advise if you have any grounds for a claim against your employer. An important part of this legal advice, is highlighting any rights you are losing by signing the agreement. A lawyer may be able to secure a better deal in terms of the amount of money you are offered. Negotiating at this stage can remove the need for you to bring formal proceedings against your employer, which can be costly, risky, complicated, stressful and take a long time.

Settlement agreements: advice for bankers & financial services professionals

For directors and senior executives in banking and financial services, consideration will need to be given to any deferred compensation, bonus calculation and payment, share schemes, long-term incentive plans (LTIPs), deferred compensation or vesting options. Bankers and financial services professionals may need to reach agreement with their employer on matters such as internal and external announcements, references and what you can and can’t do next in terms of non-compete provisions.

What if my contract contains non-compete provisions?

Your contract of employment may include non-compete provisions or restrictive covenants, or such terms may be included within the settlement agreement itself, restricting you for a set period of time on working in your industry for a competitor. A lawyer can review such provisions and where possible seek to have you released from any non-compete obligations that could restrict your ability to get a new job.

If the deal is not right, a specialist lawyer will be able to negotiate on your behalf, or discuss alternative options to cover:

the reference they will give you, to help you secure your next position
the best financial package
securing a discreet and dignified exit from the company
if you are a director, you will need to ensure that your director duties and responsibilities are covered.

Will I still receive my bonus if I sign a settlement agreement?

As a bonus is often discretionary, it can be difficult to argue that you were contractually entitled to it. However, an employment lawyer would look at your earnings history and negotiate effectively on your behalf. Commission is normally contractual, so you should receive the appropriate payment.

For individuals on complex packages, it's important to make sure the settlement agreement values these correctly. The tax implications of a high value settlement should also be examined. It is usual for an agreement not to settle your accrued pension rights or rights in relation to latent personal injury and you should seek further advice if this is relevant to your situation.

A well-constructed claim and assessment of compensation can mean you achieve a settlement on better terms than initially offered by your employer without the need to take them to court.

Do you need to talk to an expert and friendly lawyer quickly? Contact us today.

What are the main benefits of settlement agreements?

Settlement agreements can be used to:

ensure that compensation payments are made in the most tax-efficient way
bring a quick close to an employment dispute
secure financial compensation without the need of an employment tribunal
negotiate an enhanced payout which is better than any statutory minimum

As well as financial benefits there are other positives to using a settlement agreement. Other terms that can be negotiated include:

An agreed reference
Garden leave
Retaining company perks such as a laptop, car, mobile phone or private health insurance cover

A protected conversation

You can have a protected conversation with your employer to discuss any offer they wish to make. Importantly, this protected conversation is outside the formal disciplinary or grievance process. These meetings encourage employers to have frank conversations with employees about terminating their contracts. Anything that is said in these discussions is, generally, protected and cannot be used by either party against the other, in any subsequent unfair dismissal claim. There are some exceptions. If the conversation is in relation to a discrimination or whistleblowing matter, this is not protected. The employee would therefore be able to rely on this conversation if they wanted to take the matter to an employment tribunal.

What is a reasonable settlement agreement?

As you might expect, there is no one right answer to this - it entirely depends on the circumstances of the situation, including your contract of employment and events leading to the settlement agreement being offered. If, for example, the employer lacks a valid, fair reason to dismiss, or an employee has potential claims for discrimination or whistleblowing, then the issues and values involved in any exit package may be different to someone with limited length of service who is leaving as part of a genuine redundancy situation.

A settlement agreement will often be provided after negotiations to record arrangements for bringing employment to an end on agreed terms. It may also be provided with negotiations ongoing. Each case will depend on the facts and your objectives and it’s important you get legal advice on what is being proposed, to help you make informed choices on the offer and whether to accept it, because you will be signing away your rights. The proposal may include a financial package with payment in lieu of notice and an ex gratia payment (made by an employer when they do not contractually need to do so). Remember other non-financial elements can be important also, such as agreed announcements or reasons for leaving or provision of a reference. There is no one-size-fits-all, so it’s important you get legal advice on this.

What is included in a settlement agreement?

There are very specific legal requirements for settlement agreements:

it must be in writing
it must relate to the particular complaint that has led to your reason for leaving
it must include the deal of the agreement you are making with your employer
it must be signed by the employee and confirm that the employee has received independent legal advice from a solicitor
it must show that all regulatory requirements have been satisfied.

Most settlement agreements cover every possible type of claim you could bring against your employer. This means that you surrender your rights to bring statutory and contractual claims and claims for personal injury in the future.

What are the different employment rights?

You have contractual employment rights which set out details such as:

your contract of employment
job title
holiday entitlement
notice period
other benefits.

Your statutory rights cover areas such as:
being unfairly dismissed
your right to redundancy payments
discrimination on grounds such as gender or race
the right to receive the minimum wage.

Your common law rights relate to treatment of you by your employer such as negligence.

Is a settlement agreement legally binding?

Yes, it is a legally binding document but it will not be legally effective unless signed by an employment lawyer. It is usual for the lawyer to also sign a form confirming that advice has been given. This form will also confirm they are insured against the risk of a claim for the advice being negligent.

How do I know if the settlement agreement is a good deal for me?

We will be able to help you decide and help you understand why you are being offered the agreement. If the deal is not right, we will be able to negotiate on your behalf, or discuss alternative options. You will want to consider:

the reference they will give you, to help you secure your next position
the best financial package
securing a discreet and dignified exit from the company.
if you are a director, you will need to ensure that your director duties and responsibilities are covered.

What financial payments are included in settlement agreements?

Contractual payments that arise up until the termination of employment
Payment in lieu of notice
A termination payment, including an ex-gratia payment
Any additional sums that may be negotiated in consideration for confidentiality and/or post-termination restrictions
Share schemes / long-term incentive plans (LTIPs) / deferred compensation / vesting options

Will I still receive my bonus if I sign a settlement agreement?

For individuals on complex packages it's important to make sure the settlement agreement values these correctly. The tax implications of a high value settlement should also be examined. It is usual for an agreement not to settle your accrued pension rights or rights in relation to latent personal injury and you should seek further advice if this is relevant to your situation.

Is tax deducted from a settlement agreement?

It depends. As a general rule of thumb, the first £30,000 of compensation payment (which includes any redundancy payment) is tax exempt. In contrast, contractual payments, for example, the salary until the termination date, holiday pay and even bonuses, are taxable. They are classified by HMRC as post-employment notice pay (PENP). This is the case whether or not you are required to work your notice period. It is treated as earnings and subject to tax and National Insurance contribution deductions. This also applies to payments for accrued untaken holiday.

What are the legal costs for a settlement agreement?

While not required by law, it is standard practice for an employer to contribute towards the cost of your legal advice on the terms of the settlement agreement. However this is only the case if you ultimately agree to the agreement. A contribution of up to £1,000 is common, while those in more senior positions with complex packages, can expect to be offered several thousand pounds. It can be worth funding additional legal fees yourself, if you feel it would help you to achieve a better deal. Most employment lawyers will be upfront about their costs. Once you've discussed your objectives and the practical implications, a lawyer will give you an indication of the costs, allowing you to make an informed choice.

What happens if I refuse to sign a settlement agreement?

In some cases, settlement at an early stage does not happen (the employee is not obliged to sign up to terms) and things get a lot more complex. Draft agreements can be withdrawn, perhaps because new information comes to light, or the employee has potential claims that significantly exceed the value of the package offered. Making sure you get expert legal advice, will help you to navigate these complexities.

Refusing to sign may result in the termination of your employment and you will not receive your employer’s contribution (if there is one) to your legal fees. Threatening to terminate your employment before any form of disciplinary process has begun, if the settlement agreement is rejected, constitutes improper behaviour by the employer and will be disclosable to an employment tribunal. The likelihood is that you will want to raise a grievance about this type of behaviour which, if not upheld, may result in your resigning and claiming constructive unfair dismissal.

However, you should be aware that there is a time limit within which you can make your claim. This is usually three months, less one day.

What if I want to go and work for a competitor?

Other things to consider are confidentiality terms and post-termination restrictions. Your employer may want to tie you in, to abide by your existing contractual terms, not to assist a competitor. A release from these terms can be negotiated as an addition to financial compensation.

How can I take my employer to an employment tribunal?

If the parties cannot reach an agreement, the employee may seek redress at the employment tribunal. Before this, the employee must contact ACAS under what is known as the early conciliation scheme - you can read about the ACAS employment tribunal process here. At this stage, the parties will have a final opportunity to resolve matters before the individual has to decide whether to take matters further still. There are strict and short time limits associated with this. There is a process known as ‘stopping the clock’ when speaking to ACAS. This is complicated and we recommend you seek legal advice as soon as possible if you are looking to bring (or defend) a claim.

Independent financial advice combined with our legal advice

At Tees we offer our clients combined legal and financial advice. Our range of specialists can help you with:

Call our specialist solicitors on 0808 231 1320

Tees is here to help

We strongly recommend you seek advice, as soon as possible when contemplating decisions about termination of employment. Lengthy and costly litigation can be extremely stressful to both parties. Where possible, settlement agreements can help you to end an employment relationship in a mutually convenient manner. We have seen the conflicts many times - and from both sides. We are very experienced in helping you to achieve the best, practical solution possible in a cost-effective and efficient way.

It is a legal requirement that the employee gets advice from a qualified professional and a settlement agreement will only become binding once they have received independent legal advice on it. If you are an employee, remember that an employer will usually pay some legal costs for you to see a solicitor. If you've been asked to sign a settlement agreement or are facing potential redundancy, call us on 0800 013 1165. Our employment experts at Tees can protect your rights, negotiate the best possible outcome and remove some of the anxiety and uncertainty for you. We are experienced in dealing with high-value and complex settlement agreements including those of CEOs, directors, senior executives and managers. Our offices are within easy access of London and we routinely advise clients further afield, including internationally.