Understanding Settlement Agreements:
What Employees Need to Know
If your employer has handed you a settlement agreement and advised you to seek legal advice, you may be feeling uncertain about what it all means. At MHHP Law, we regularly assist employees with understanding and navigating these agreements, ensuring they receive fair treatment and fully understand their rights.
What Is a Settlement Agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between an employer and an employee. Typically, it records agreed terms on which the employment relationship will end, and in return, the employee agrees not to pursue certain legal claims against the employer, usually in exchange for a financial settlement.
Why Legal Advice Is Required
Under section 203 of the Employment Rights Act 1996, a settlement agreement will only be legally valid if the employee has received advice from an independent legal adviser on the terms and effect of the agreement, particularly on their ability to bring future claims. This requirement ensures that employees enter into such agreements fully informed.
Our Role as Legal Advisers
When you come to us with a settlement agreement, our role is to:
- Review the terms in detail and explain their legal effect
- Ensure you understand what claims you are waiving
- Highlight any restrictive covenants or confidentiality obligations
- Assess whether the financial and practical terms offered are reasonable
- Where appropriate, negotiate improved terms on your behalf
Key Clauses to Consider
Common terms in settlement agreements include:
- Termination date and the treatment of outstanding holiday pay or notice pay
- Settlement payment, often described as an ex-gratia sum
- Tax indemnities, which may shift responsibility for underpaid tax to the employee
- Reference and announcement clauses
- Non-derogatory statements, which prevent either party from disparaging the other
- Confidentiality provisions, covering both the terms of the agreement and the circumstances leading to it
- Restrictive covenants, which may continue post-employment
Our Fees and the Employer’s Contribution
Our legal fees will vary depending on how much the terms of the proposed agreement need to be negotiated to best suit your needs but your employer will typically make a contribution towards those fees. As a guide only our fees on this work are likely to be between £500 and £900 plus VAT and the contribution of the employer is likely to be between £400 and £600 plus VAT.
It’s Not Just a Rubber Stamp
Receiving legal advice is not a box-ticking exercise. In many cases, we are able to help employees achieve better outcomes – whether that’s an increased settlement, more favourable reference wording, or the removal of onerous clauses.
What If You Don’t Want to Sign?
You are not obliged to sign a settlement agreement. Depending on the circumstances, you may wish to remain in employment, or consider bringing a claim in the Employment Tribunal. We can talk you through the risks and benefits of each option.
Don’t Be Rushed
Employers often impose deadlines for signing, but you are entitled to reasonable time to consider the offer. If you feel pressured, we can contact the employer on your behalf to agree a more realistic timeframe.
Get in Touch
If you’ve been offered a settlement agreement, get in touch with our employment Partner, Tayo Taylor today. She will provide clear, pragmatic advice to help you make the best decision for your future.
This article is intended for general information only and does not constitute legal advice. If you require advice on a settlement agreement, please contact us directly.
If you want advice on Settlement Agreements, you can contact Tayo Taylor at tayo.taylor@mhhplaw.com or on 020 3667 4783.
