‘Have you been offered settlement agreements by your employer – should you sign it?’ Key issues to consider.

If your employer has presented you with a settlement agreement – you’ve got a decision to make!

  1. Sign it and you’re out of a job with potentially a sub-standard package to support you, or
  2. Refuse it and you could face taking your chances in a disciplinary procedure or a redundancy situation.

This can be a stressful time as you may have had no idea this was coming and it can have a serious financial impact on you. You need to consider the following:

Settlement agreements – what are they?

Settlement agreements came into force on 29 July 2013 and were previously known as compromise agreements. Settlement agreements are legally binding agreements that set out the full terms of a settlement between an employer and an employee.

Such agreements are usually given to employees when they are being made redundant, both on a voluntary and compulsory basis, or if an employer thinks he or she is performing badly in their job or is guilty of misconduct and does not wish to pursue a formal process and risk a claim against the employer.

Settlement Agreements are usually used when employers are paying more than the statutory minimum entitlement. The benefit to employer of paying more is that the settlement agreement gives the certainty of knowing there will be no dispute or claim afterwards

You receive a sum of money in return for losing your job and certain employment rights, such as bringing a claim against your employer. The settlement agreement is the final sign-off before you leave work.
Each settlement agreement varies but typically, there are clauses that deal with:

  • the claims to be settled;
  • the payments you will receive and the relevant tax issues;
  • confidentially/gagging clause (so you can’t bad mouth your employer) and any agreed reference from your employer.

Protected conversations

If you’re given a settlement agreement, your employer is likely to also have a ‘Pre-Termination Negotiation’ with you. Pre-Termination Negotiations (otherwise known as a ‘protected conversations’) came into force at the same time as settlement agreements.

They allow employers to have frank discussions with employees about terminating their contracts. In such a meeting it is imperative you obtain as much information as possible as to why this settlement agreement is being offered and also how the severance package has been calculated, Anything that’s said in this discussion is ‘protected’ and cannot be used be either party against the other in an unfair dismissal claim.

However, there are exceptions: the conversation is not protected by the new laws in discrimination cases, whistleblowing or other automatically unfair dismissal claims.

Also, the negotiations no longer have to remain off-the-record if either party behaves badly during the process. In these cases, what was said during the ‘protected’ conversation could come out into the open during a subsequent employment tribunal.

If discriminatory remarks or admissions are made by your manager or employer ensure you make a note of exactly what was said either at this meeting or straight afterwards as it is likely that you would then need to raise a grievance about these statements before issuing a claim in an employment tribunal.

What legal advice will you get?

Once you’ve signed a settlement agreement, it is legally binding on all parties’. This is the reason why the legislation requires that you take independent legal advice on the terms and the effects of the settlement agreement. It is customary for the employer to pay for this, or at least make a significant contribution.

Anthony Paul Legal can check;

  1. whether the deal is fair or not;
  2. advise you on the rights and obligations within the agreement;
  3. whether you have any claims against your employer and the potential costs and value of any tribunal claim – such as discrimination or unfair dismissal.

It is important to make sure the lawyer you choose is an employment specialist, such as Anthony Paul Legal.

Consider your finances

A potentially reasonable (it all depends on each individual case) negotiated settlement is equivalent to four to six month’s equivalent salary, including notice monies.

If you are offered a settlement agreement because your employer is unhappy with your performance, or conduct, and would otherwise pursue a performance/disciplinary process, it may be tempting to sign the agreement and avoid the hassle. But first, consider the benefits of the agreement (i.e. money, reference, outplacement support, etc).

If it’s not a good deal, now is the time to negotiate.


An employment solicitor will examine your contract to make sure you are being provided with all your contractual rights. Along with the cash payment, the lawyer will also make sure you’re getting the best deal on relevant bonuses and pension payments as well as your correct contractual notice.

A package can be re-structured to make it more tax efficient for both the employer and employee. The first £30k of your compensation (non-notice element) is usually non-taxable by way of a dispensation by HMRC. Sometimes a deal can be structured that benefits both sides.

The issue of what pay and benefits are taxed can be complicated. Payments in lieu are taxable but the employment lawyer will look at the contract and advise on what can be paid tax-free.

A car can become an issue. It is possible for an employer can transfer a car to an employee where they would not be prepared to transfer the cash value of that car to the employee.

Some employers will offer career coaching or pay for further training to help you secure another job. Let your solicitor know what you want, and they can ask an employer to consider your request.

You could ask if it is possible to leave without working a notice period, or making it shorter.

An employer may well refuse but it can be a case of those who don’t ask, don’t get.

No deal?

If you don’t sign the agreement, then you preserve your full rights to make a claim against your employer but you’ll need to act quickly. There’s a strict time limit to issue a claim of three months less one day for a routine unfair dismissal claim, subject to the requirement of complying with the Acas early conciliation process (which can in certain circumstances extend the normal time period to file a claim).

How much is statutory redundancy pay?

Statutory redundancy is calculated using a formula which is based on the length of service, your age and your weekly pay.

You have to have worked for your employer for two years to qualify for statutory redundancy pay.

If you have, you get:

  • 0.5 week’s pay for each full year worked when you’re under 22;
  • 1 week’s pay for each full year worked when you’re between 22 and 41;
  • 1.5 week’s pay for each full year worked when you’re 41 or older.

However, for the purposes of the calculation, pay is capped at £479 per week before any deductions.

Length of service is capped at 20 years and the maximum amount of statutory redundancy pay is therefore £14,370.

The easiest way to work out what you’re entitled to is to use the HMRC’s redundancy calculator.

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