Settlement agreements are often associated with workplace disputes, but in reality, they are commonly used in a wide range of employment situations, including redundancies and mutually agreed exits.
In a recent episode of The Legal Compass podcast, Employment Solicitor Sanjay Rall discussed the practical realities of settlement agreements and explained why employees should never assume they are simply routine paperwork. Listen back to this episode here.
What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and employee. Most commonly, it is used to bring an employment relationship to an agreed end.
In exchange for compensation and/or other benefits, the employee agrees not to pursue legal claims against their employer.
What Does a Settlement Agreement Typically Include?
Settlement agreements can cover a wide range of issues, including:
- Financial compensation
- Notice pay
- Bonuses and benefits
- References
- Confidentiality clauses
- Restrictive covenants
- Arrangements for leaving employment
The exact terms will depend on the circumstances and the parties involved.
Common Misconceptions
One of the biggest misconceptions is that settlement agreements only benefit employers.
In practice, they can provide significant advantages for employees, including enhanced financial packages, agreed references and certainty regarding their departure from a business.
They can also help both parties avoid lengthy and stressful Employment Tribunal proceedings.
Why Independent Legal Advice Is Essential
Employees are legally required to receive independent legal advice before a settlement agreement can become valid. This is not simply a procedural requirement.
A solicitor will review the terms of the agreement, explain the legal consequences and if applicable identify any issues that may not be immediately obvious.
Examples can include:
- Incorrect notice calculations
- Ambiguous drafting
- Missing contractual entitlements
In the podcast, Sanjay discussed a matter where a review of an employment contract identified that an employee was entitled to three months’ notice pay rather than the one month offered within the draft agreement.
Can Settlement Agreements Be Negotiated?
Absolutely.
Although financial compensation is often the headline issue, a number of other terms can be negotiated, including:
- Restrictive covenants
- Reference wording
- Confidentiality obligations
- Announcement wording
- Legal fee contributions
Depending on the circumstances, these provisions can be just as important as the financial settlement itself.
What Should You Do If You Receive a Settlement Agreement?
Before speaking with a solicitor:
- Get a copy of your employment contract and obtain any relevant workplace policies.
- Create a timeline of key events.
- Consider whether you are happy with the proposed package.
Providing this information at the outset can help your solicitor assess the agreement quickly and effectively.
Final Thoughts
Settlement agreements are designed to create a clean break between employer and employee. Once signed, they are intended to be final.
For that reason, taking legal advice before signing is one of the most important steps an employee can take.
If you have received a settlement agreement and would like advice on your options, the Employment Law team at Ison Harrison can provide clear, practical guidance tailored to your circumstances. Call us on 0800 389 3030 or email us at hello@isonharrison.co.uk
