Employee guide to negotiating a settlement agreement

20 July 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.

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:

  1. Settlement agreements are voluntary, you do not have to agree to a settlement agreement and you have the right to negotiate the terms of any agreement

  2. 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)

  3. 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

  4. 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

  5. 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 means of ending 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.

Such disputes include, but are not limited to:

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.

Although not a rule of law, it is generally good practice for your employer to allow 10 working days for you to consider the proposed agreement and to take the appropriate legal advice. This period may be longer or shorter, provided you and your employer both agree to this.

Things to consider

A settlement agreement is not always about financial compensation, other things you may want to be included are:

  • A reference from your employer
  • Removal or amendment of restrictive covenants within your contract of employment
  • Company-wide communications about your departure (to avoid negative inference)
  • Shares and bonuses – if you are entitled to these in the course of your employment, they should be considered in any settlement agreement.
  • Payment in lieu of benefits, such as private healthcare, company vehicle and private pension contributions

It is important to remember that there is no exhaustive list of what can and can’t be included. A settlement agreement is your opportunity to present any changes and/or outcomes you want. Our expert team will be able to advise you on the reasonableness and likely outcome of your intentions.

You should also consider what the best course of action would be for you. You may be able to negotiate with your employer about working your notice period. Some employers offer the option of garden leave or payment in lieu following immediate termination of employment. It may be worth approaching your employer to see if these options are available.

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 and whether the payment is compensation for loss of employment. Settlement payments can be tax free up to a certain limit, but any payments made in lieu of holiday or notice will be taxable as normal earnings.

Getting expert legal advice from a Co-op Legal Services Employment Law Solicitor may 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. This is because it is a legal requirement for independent advice to be provided and a failure to do so is likely to render the agreement unenforceable.

Once your employer has 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.

Benefits of a settlement agreement

A settlement agreement can offer benefits 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 you as an employee to leave employment quickly when things aren't working out and move on

Positive for you – the financial cost of a settlement agreement is usually paid by the employer

Settlement agreements are a common, pragmatic and effective way of bringing about a resolution to an employment issue, enabling both parties to move on.

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:

  • The settlement agreement must be in writing – any oral agreement will not be binding
  • 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
  • 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
  • Your independent advisor must have Professional Indemnity Insurance in place
  • Your independent advisor should be named in the settlement agreement

The settlement agreement must state that all these provisions have been met and that as a result, the agreement is valid

Breach of a settlement agreement

If your employer breaches the settlement agreement, for instance by not paying the sum due or infringing other terms of the agreement, you can bring a claim in court for breach of contract.

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. We will discuss our reasonable fee for this service with you and will always be transparent about our charges.

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