Employee guide to negotiating a settlement agreement

21 January 2021

If you receive a settlement agreement offer from your employer, you have a few options on what to do next. Depending on the circumstances of the offer, you might decide to negotiate on the settlement agreement. This guide will help you to identify some areas that could help you to get a better offer.

For employment law advice, call our Employment Law Solicitors on 03306069589 or contact us online and we will call you.

Understanding an employment settlement agreement

Firstly, you should understand some of the key points that are usually included in an employment settlement agreement. These are:

  • You do not have to agree to a settlement agreement and you have the right to negotiate the terms of any agreement

  • A settlement agreement usually means you can't take your employer to the Employment Tribunal if you sign the agreement (this only covers any claim types named in the agreement)

  • A settlement agreement usually means you receive a financial payment as part of the settlement and normally a reference to use when applying for new jobs

  • Any negotiations that take place are confidential and as a general rule cannot be used in an Employment Tribunal by you or your employer. You should always mark any written communications to your employer 'without prejudice' during settlement negotiations so that they cannot be used in any future legal proceedings.

  • A settlement agreement is legally binding. Once the agreement has been signed by both parties and a Solicitor, it becomes a legally binding document which can be enforced by either side.

How to use a settlement agreement

Most people think that settlement agreements are used as a way to end employment. While this is a common use of settlement agreements, it's not the only situation they're used in.

If the relationship with your employer is not working, a settlement agreement can help you both separate from your work relationship cleanly. They can also be used to settle disputes with your employer, meaning you remain employed in your job. Some disputes at work could be over holiday pay issues, workplace harassment or similar work related problems.

Your employer may approach you with a settlement agreement proposal or you may decide to ask your employer for a settlement agreement. However a settlement agreement is used, you have the right to negotiate the terms.

Negotiating a settlement agreement

You should carefully consider the amount of compensation you are being offered in the settlement agreement. The settlement figure should reflect the seriousness of the issues you are facing at work.

If your employer is adding in restrictive covenants that will hamper your ability to get a new job, there should be additional compensation for this. It should also reflect the amount of money you would potentially be awarded if you took your claim to an Employment Tribunal and any additional costs this would have for your employer.

You should have a good idea of the amount of compensation you are looking for before you start negotiations. This will help you to negotiate to a level you feel comfortable with.

Negotiating your settlement agreement in person may not be your best approach. You may want to conduct these negotiations in writing (usually by email). Whether you negotiate face to face or by email, you should state that you are discussing this 'without prejudice'. This is simply a legal term to show that your discussions are off the record and therefore cannot be used at any employment Tribunal.

Is a settlement agreement tax free?

Settlement agreement compensation payments can be tax free in England and Wales depending on how the agreement is written. Settlement payments are tax free up to a certain limit, but any payments made in lieu of holiday or salary will be taxable as normal earnings.

Payment in lieu of notice may also be liable to tax in certain circumstances. Getting expert legal advice from a Co-op Legal Services Employment Law Solicitor will help you to minimise your exposure to tax.

Who pays for legal advice on a settlement agreement?

Your employer usually pays for you to get independent legal advice about your settlement agreement. Once they have outlined the draft details of your settlement agreement, your Employment Law Solicitor can review it.

If you feel more comfortable, you can also pay a Solicitor to negotiate the terms of your settlement agreement for you. This removes you from the process and your employer may well concede more because they are dealing with someone other than you.

Positives and negatives of a settlement agreement

A settlement agreement can offer positives and negatives for both you and your employer. Here are some of them:

Positive for you and your employer – resolves an issue without the time and cost of an Employment Tribunal (ET)

Positive for you – gives you a financial incentive and a reference to end the work relationship

Positive for you and your employer – helps an employee leave employment quickly when things aren't working out

Negative for your employer – the financial cost of a settlement agreement

Negative for you and your employer – more damage to your work relationship if the dispute is not resolved.

Negative for you and your employer – where settlement agreements are being used instead of good management.

You can see that most of the positives fall on your side as an employee and the negatives will only affect you if you are staying in the company.

Making a settlement agreement legal

There are certain items that must be included in a settlement agreement. This is to ensure that you have relinquished any rights you have to take your employer to an Employment Tribunal. These items are:

  1. The settlement agreement has to be in writing
  2. It must be explicit about the complaint or the claims it covers. If it does not explain fully each type of claim that it covers, your employer will not have protections against those claims.
  3. You must have had independent advice. This should not only cover the terms of the agreement, but the effect of it too. Full explanation should be given about the fact you will relinquish any chance of a claim against your employer.
  4. Your independent advisor must have Professional Indemnity Insurance in place.
  5. Your independent advisor should be named in the settlement agreement.
  6. The settlement agreement must state that all of these provisions have been met and that as a result, the agreement is valid.

How our Employment Solicitors can help you

Our Employment Law Solicitors know how important it is to have someone in your corner if you are negotiating a settlement agreement.

We've helped thousands of employees with their employment law claims and we can help you too.

We only represent employees, meaning there is no conflict of interest as we don't deal with employers. Our fixed fee services mean there are no nasty surprises at the end of your claim.

For legal advice on the meaning of the terms in your settlement agreement (without any financial negotiations and without advice on the merits of any Employment Tribunal claims) we offer a fixed fee. Your employer will usually pay these legal costs.

If you're not sure whether you are getting enough compensation as part of the settlement agreement, we can offer you strategic advice on your options. These fees will be payable by you.

After receiving our strategic advice on your options, you may decide that you want us to try and negotiate a better offer from your employer.

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