What is a settlement agreement (and what to do if you are presented with one!)

What is a settlement agreement?

A settlement agreement is an agreement between an employee and an employer to settle issues which might arise under employment law.  The employee agrees to waive all employment-related claims which he or she may have against their employer, usually in return for a payment.  It usually (but not always) arises in the context of the employment being terminated. These agreements used to be known as compromise agreements.

Why might an employer suggest a settlement agreement?

Sometimes, a settlement agreement will be suggested as a way of resolving matters between an employer and employee where both sides are unhappy with an on-going situation, or even where the employee has already raised the prospect of bringing an Employment Tribunal claim against the employer.  However, an employer may also propose a settlement agreement out of the blue, where the employee has had no prior notice of any problems.  An employer may decide that the employee’s performance is not up to scratch, or simply that the employee is not the right fit for the business.  Rather than going through a more formal process aimed at bringing the employment to an end, the employer may decide to try to agree severance terms with the employee. 

How is my employer likely to present a settlement agreement?

If your employer is thinking about trying to bring your employment to an end via a settlement agreement, they are likely to suggest having a conversation with you which they might describe as ‘without prejudice’ or ‘protected’.  The ‘without prejudice’ and ‘protected conversation’ labels allow the employer to raise the issue of terminating your employment with you without the risk that you will later use this conversation against them. 

What normally happens during a protected conversation or a without prejudice discussion?

Your employer will likely give you an idea of the reason why they wish to bring the employment to an end and will usually set out the severance terms they have in mind.  While this figure may initially seem attractive, bear in mind that employers often propose a single payment, but that this may include sums to which you are contractually entitled anyway, such as notice pay or pay in respect of accrued bonuses or annual leave.  This is why it is important to take specialist advice on a settlement agreement – so that you understand fully both what you are getting and what you are giving up.

Speaking of which..... my employer has said that I need to take legal advice from an employment solicitor on this - can I not just sign the agreement if I am happy with the terms?

Employers will insist that you take legal advice because a settlement agreement is not valid unless you have done so.  This is to protect the employee, as the rights which they are waiving may be valuable, so it is important to understand the implications of the agreement.  The good news is that your employer will almost certainly make a contribution towards your legal fees and many firms (including Ergo Law) will do their best to ensure that you don’t have anything to pay over and above your employer’s contribution.

I am happy with the prospect of leaving my job in return for compensation, but the deal does not seem that great - can I negotiate the settlement terms?

Yes, and of course this is one of the benefits of taking legal advice.  If your adviser believes that the deal which you are being offered is poor, they will be happy to negotiate on your behalf to improve the offer.  However, the strength of your position will of course depend on the circumstances of the termination of your employment. 

See our previous article “Five tips for negotiating a settlement agreement”.

If I am unhappy with my employment, can I suggest a settlement agreement to my employer?

Yes, there is no rule that the proposal must come from the employer, but you do have to bear in mind that, if you suggest that you are unhappy with your employer and want to leave, it may be difficult to remain working there if you are unable to agree severance terms.  If you are considering this course of action, we would recommend taking advice from an employment law professional so that you have a clear understanding of the strengths and weaknesses of your bargaining position.  Ergo Law has a good deal of experience in raising the issue of an agreed termination and negotiating the terms on behalf of employee clients, and we would be happy to assist.

If you need advice or representation in relation to a settlement agreement, please contact either Emma Reid (0131 618 7007) or Cathy Donald (0131 618 6189) at Ergo Law Limited for a no-obligation discussion.