Settlement Agreements – Your Questions Answered

September 2021 is seeing more and more employees being presented with a settlement agreement by their employer. The reason more of these agreements are being offered is due to the imminent end to the Government furlough scheme (launched during the first Covid-19 lockdown) with employers being forced to review their HR and personnel count as business models change.

At Swansea Legal Solutions we have an experienced team which specialises in Settlement agreements and we are currently working with a high number of people who are coming to us to get their agreements checked and rectified.

There can be quite a bit of confusion around the terms of Settlement Agreements and what an employer and an employee can and cannot do. So, we’re taking this opportunity to respond to the most frequently asked questions on this topic which are as follows:

What is a Settlement Agreement?

A Settlement Agreement (previously known as a Compromise Agreement until 29^th July 2013) is a legally binding agreement through which a current or former employee agrees to waive or settle all possible claims against their employer. This is often in return for a payment which is usually made shortly after termination of employment.

The purpose of the agreement is to record the full settlement terms. It will typically include written details of any financial payments which are being made and a list of the claims that are being waived. The agreement will also set out other important details governing the arrangement. It is highly likely that the agreement will include a confidentiality clause. This means that employees should not discuss the terms or existence of the agreement with anyone else.

What are the Benefits of a Settlement Agreement?

A settlement agreement can provide a clean break to both the employee and employer, offering an efficient alternative to the time and cost associated with redundancy or formal disciplinary processes. The benefit to the employer is that the employee is waiving all of their employment law claims and the terms of the settlement must be kept be confidential.

The terms that are negotiated through Settlement Agreements can often represent a better financial outcome than one which the employee may achieve by taking his or her case to an employment tribunal. This is partially due to the uncertainty and ‘litigation risk’ when it comes to making a claim through a tribunal. It can also provide the employee with control over specific terms, such as a reference or an agreed announcement which can be extremely valuable to an employee moving forward.

Importantly, by entering into a Settlement Agreement, the employee can avoid the financial and emotional burden of taking claim to an employment tribunal.

How Long Does it Take to Agree the Terms of a Settlement Agreement?

In general, Settlement Agreements can be agreed relatively quickly. If you are happy with the terms of the proposed agreement, a solicitor should be able to finalise the agreement for you within a few days. If there are further negotiations needed then this will mean that the process will take longer. The timeframe is usually dependant on how quickly your employer responds and your solicitor should keep you updated on this.

What to Do if You are Offered a Settlement Agreement?

If you are offered a Settlement Agreement firstly you should carefully read through the agreement proposal. A Settlement Agreement can only become legally binding once you have taken independent legal advice on the terms included in the proposal. This means that you must take a copy of the agreement to an employment law solicitor.

Your solicitor will be able to advise you on the terms of the proposed agreement and how it may affect your rights to pursue any employment claims before an employment tribunal. The solicitor will normally be required to sign a certificate to confirm that they have given the required legal advice to you.

In addition to the financial clauses in your Settlement Agreement, there will be other important provisions set out within the clauses in the agreement. Your solicitor will explain what each clause means and answer any specific questions that you may have.

Can you Refuse to Accept a Settlement Agreement?

Settlement agreements are completely voluntary and their terms must be agreed by both parties. Once the agreement has been signed by you and your employer it will become a legally binding document.

You should not sign the Settlement Agreement if you do not wish to do so. If you do not sign the agreement your employer will not pay you the compensation sum and your employer may look to commence a formal process such as redundancy or disciplinary action with you depending on the circumstances.

In many instances, an employer may pay a contribution towards your legal fees in obtaining advice about the agreement. But if you decide not to sign the agreement you will need to personally pay for any fees incurred in getting advice on the terms of the Settlement Agreement.

When will the Compensation included in the Settlement Agreement be Paid?

Usually the sums are paid between seven and 28 days of you signing the agreement or in your employer’s next payroll. However, this can vary depending on your termination date or what has been agreed. The payment terms will be contained in the Settlement Agreement and your solicitor will be able to confirm this.

It’s important to note that your employer will deduct from the payments under the agreement all the income tax and employee National Insurance contributions (NICs) that it is required to deduct by law. Your final compensation sum will be a net sum after these deductions have been made.

Can a Settlement Agreement be Withdrawn or Cancelled?

The Settlement Agreement will not be legally binding until it has been signed by both parties. This means that, prior to both parties signing, it would be possible for either side to change their mind or withdraw from the process.

Once the agreement is binding, it cannot then be cancelled or changed without the consent of both the individual and the employer.

This would depend on the nature of the breach and the terms of the agreement itself. The agreement may contain wording about this and what could happen if you were to breach a key provision.

However, when deciding on whether to accept a settlement agreement there are many factors to consider just a few are: