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Should I Sign a Settlement Agreement?

For any employee, being asked to sign a Settlement Agreement may lead to confusion, feelings of intimidation, and worry.  In part, this is because while the employer will understand the precise legal terms and implications of signing the Settlement Agreement, the employee, not being familiar with such documents will be an immediate disadvantage.  If you have been handed a Settlement Agreement for consideration, it is essential that any decisions from this point forward are made with a solid understanding of the document you are being asked to sign, and how it may affect your rights and your future career.  Make no mistake, not all Settlement Agreements are fair and equitable; with some being overly tipped in favour of protecting the employer.

What is a Settlement Agreement?

A Settlement Agreement is a document drafted by an employer, which puts in place specific terms for the termination of an employee. They may be used for a number of reasons, but the principle purpose is to protect the employer from possible future legal action.  The exact terms contained with the Settlement Agreement may vary, but will typically include:

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  • Termination date
  • Settlement package on offer (e.g. salary, pay in lieu of notice (PILON), outstanding expenses, in lieu of holiday entitlement, redundancy pay, and compensation reflecting a potential claim)
  • Pension entitlements
  • Agreement to provide a reference
  • The issue/s being settled
  • Rights being waived
  • Confidentiality or gagging clauses

The payment made by the employer as part of signing the Settlement Agreement is made in return for the waiving of the employee’s rights to bring a claim under statute law, the contract of employment, or common law.  Such an agreement may be entered into at any stage of employment, whether during the initial recruitment process, during employment, or on termination.

Signing a Settlement Agreement Does Not Waive All of Your Statutory Rights

It is a common misconception that a Settlement Agreement can mean all of your legal rights are waived. The right to statutory maternity pay, statutory paternity pay, statutory adoption pay, or statutory shared parental pay cannot be removed by a Settlement Agreement.  This is because there is an absolute restriction on the contracting out of these payments.
A Settlement Agreement can, however, be used to settle statutory claims including:

  • Claims for ‘equality of terms’ (as per sections 120 and 127 of the Equality Act 2010 and under section 2 of the Equal Pay Act 1970.
  • Claims for pregnancy or maternity discrimination, direct or indirect discrimination, victimisation or harassment related to sex, marital or civil partnership status, gender reassignment.
  • Claims for direct or indirect discrimination, victimisation or harassment related to race, disability, sexual orientation, religion or belief, and age.

Given the nature of this area of law, it is essential to understand the boundaries of the Settlement Agreement you are entering into, and whether this may bar you from bringing specific claims according to your statutory rights in the future.  

Other Considerations When Signing a Settlement Agreement

No employer can force or coerce you into signing a Settlement Agreement.  By taking the time now to seek changes before signing, you may incur fewer restrictions in the future.  From the outset, seek legal advice from a specialist employment solicitor who will review the document, explain the key terms, and outline your options for improving the offer made and reducing or removing any contentious aspects.

Some of the considerations to bear in mind include:

  • Look out for terms which place unfair restrictions on you, including non-compete clauses which may prevent you from seeking employment in the same sector or with a competitor for a defined duration – this is to mitigate the risk of you disclosing confidential company information which may be at the advantage of another company.  And if your career is impacted by this restriction, consider the financial cost this may have, with a view to increasing your settlement amount.
  • Work out the value of a potential claim against your employer – if you are settling for a lower amount than you would otherwise be entitled in a claim against the employer, this may be grounds for seeking a larger amount of compensation, or refusing to enter into the agreement at all.
  • Will your employer give you a positive reference?  
  • Can your termination payment be made in a more tax-efficient way – e.g. by being paid into a pension.  It will be important to seek clarity regarding how payments will be taxed.
  • Does the termination payment cover everything you are entitled to?  For example, if you had benefits such as medical insurance or other ‘benefits in kind’, it is reasonable for these to be included as an ongoing provision or a one-off payment.
  • Will the employer contribute towards any legal fees you incur?
  • If you have share options or other such incentives, you will need to clarify if these will remain or whether you will be adequately compensated from the loss of these.

Final Words on Signing A Settlement Agreement

Be under no illusion, Signing a Settlement Agreement is highly negotiable.  If you are asked to sign one, don’t.  Instead, take your time and seek legal advice.  Retaining your rights to bring a claim may ultimately prove more beneficial to you and your future career. If, however, the agreement is favourable to you and does not place you at an unfair disadvantage, then it may present a way for you to end your employment and move on to a brighter future, with the resources you need to find an exciting new role.  

Guillaumes in Weybridge is a full-service law firm offering specialist advice courtesy of our employment lawyers.  If you’re looking for support and guidance regarding a Settlement Agreement, we can help.  To make an appointment, contact us via our enquiry form or call 01932 840 111 today.