What you need to know when your employer offers you a Settlement Agreement

David Dixey, Employment Lawyer at Holmes & Hills Solicitors discusses the pros and cons of settlement agreements for employees that are offered them.

At the current time and as a result of the Coronavirus situation, many businesses are considering their structure, potentially looking to downsize their operations and reduce the size of their workforce.

When reducing their workforce, employers can utilise formal redundancy procedures or, agree settlements with individual employees which results in the termination of their employment. In these situations employers offer individual employees what is called a Settlement Agreement.

Why would an employer agree settlements instead of make official redundancies?

Offering a Settlement Agreement to an employee is often a quicker route to terminating the individual’s employment, meaning the employer stops paying their salary (and National Insurance and Pension contributions) sooner than might be the case if the employer had to follow strict redundancy procedures, which are set out in legislation.

Settlement Agreements also offer employers legal protection, with such agreements usually involving an employee agreeing to give up the right to bring Employment Law claims at tribunal in return for payment of some level of financial compensation plus the usual sums received on termination (notice pay, holiday pay etc).

Potential Advantages for an Employee:

As stated, it is no secret that a Settlement Agreement is mainly intended to protect the interests of the employer and provide them with protection against future claims.  However, there are advantages for employees as well, such as:

- Compensation payments under Settlement Agreements are often more favourable than termination following ordinary redundancy;

- Employees can often influence the wording of any reference which is then incorporated into the terms of the settlement and must therefore be adhered to by the employer when approached by future prospective employers. This can be important where an employee is leaving “under a cloud” or in circumstances where a reference might not otherwise be provided;

- Tax rules covering termination payments can be more favourable allowing compensation to be paid without deduction;

- Settlement Agreements usually contain a confidentiality clause which can favour both employer and employee, meaning a departing employee can often “save face” and influence any announcement issued to colleagues etc;

- Negotiating the terms of a Settlement Agreement can provide an opportunity to raise and address other outstanding issues that otherwise may not be addressed, and which might therefore end up in court or tribunal. For example, there may be an issue about an outstanding bonus; or the extent to which a departing employee should be restricted from working for a competitor. Further compensation can be negotiated in respect of these issues;

Resolving an employment dispute, or negotiating the terms of a redundancy, via the Settlement Agreement route is often preferable to potentially lengthy, costly and risky litigation. Employers usually also provide a contribution towards the employee’s costs of obtaining the required independent legal advice. A Settlement Agreement only binds an employee if they have obtained independent legal advice on the consequences of signing and the adviser has completed a certificate to confirm this advice has been given.