Questions To Ask Before Signing a Settlement Agreement

07 April 2015

If you’ve been offered a Settlement Agreement (formely known as a Compromise Agreement) by your employer, it’s worth asking a few questions before agreeing the terms. Here are a few things you may like to consider:

1. How much should you expect?

You may have an idea of how much money you would like to receive under the Agreement but you should ensure that your expectations are realistic. The sum offered will vary significantly depending upon the specific circumstances.

2. Are you working your notice period?

If you’re not working your full notice and are being paid instead - known as “payment in lieu of notice” - the details should clearly be stated in the Settlement Agreement / Compromise Agreement to ensure there are no misunderstandings.

3. Has your employer agreed to provide a positive job reference?

If your employer agrees to provide a reference this should be attached to the Settlement Agreement. A Settlement Agreement will also usually include a “non-derogatory clause” which may prevent your former employer from giving less favourable references if they are approached by your new potential employer.

4. Are there any onerous restrictive covenants?

If you already have restrictive covenants as part of your employment contract - such as a non-competition clause which seeks to prevent you from working for a competitor for a certain period these restrictions will continue after your employment has ended so it may be worth negotiating to waive these as part of your Settlement Agreement, to make them less burdensome. Also, make sure that the Agreement does not introduce any new restrictive covenants or prevent you from talking about the reasons for your departure to other people.

5. Have any bonus payments been agreed?

The Settlement Agreement should properly reflect any outstanding bonuses which you are owed. Make sure that it covers the amount and states a payment date. Any relevant stock options or share awards should also be dealt with as part of the Agreement.

6. Have you arranged holiday pay?

If you’ve accrued holiday which has not been taken, you should decide whether to use it before the end of your employment or accept a payment in lieu. Any outstanding holiday pay due to be paid should be noted in the Settlement Agreement.

7. Have you considered any other claims you may have against your employer?

These may be worth more than the amount being paid under the Settlement Agreement. It’s worth obtaining employment law advice to find out where you stand on matters such including:

8. Has your employer agreed to pay your legal fees?

Many employers will pay legal fees at a minimum of £250 plus VAT to cover the cost of the legal advice you receive on the Settlement Agreement. Not only should advice be sought from an employment law solicitor to ensure that your interests are protected under the Settlement Agreement, but it is a requirement of the Agreement. An employment law Solicitor will explain the terms of the Settlement Agreement and its effect on your ability to pursue any claim.

9. Do you have to pay tax on your Settlement Agreement?

The first £30,000 of compensation paid under an Agreement is normally free of tax and NI deductions.  Any redundancy payment that is being made is included in the £30,000 sum. In some circumstances, your notice period can also be included in the tax free sum. You should seek advice on what sums will be paid to you free of tax.

10. Have you received independent legal advice?

This is a requirement of a legally binding Settlement Agreement. Once you’ve taken legal advice, negotiated your terms and signed an Agreement that suits both you and your employer, you cannot change your mind. So make sure you ask your employment law solicitor all the questions you may have before signing.

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