When leaving a job, employees in the UK may be presented with a settlement agreement. These agreements are legally binding contracts that outline the terms of an employee’s departure, often including compensation and other conditions. Whether you’ve been handed a standard settlement agreement or what your employer refers to as a normal settlement agreement, it’s essential to understand what you’re signing.
This detailed guide will explain the key elements typically found in a standard settlement agreement, explore its purpose, and help you make informed decisions. We’ll also provide tips on seeking legal advice and how CheckMySettlement.com can assist you through this process.
What Is a Settlement Agreement?
A settlement agreement (previously known as a “compromise agreement”) is a legal document between an employer and an employee that settles disputes or brings an employment relationship to an end. While the terms may vary, a normal settlement agreement usually includes compensation in exchange for waiving your right to bring a claim against your employer in the employment tribunal.
This agreement is legally binding, meaning that once signed, you cannot pursue further legal action related to the issues covered in the agreement. Employers often use standard settlement agreements to avoid prolonged disputes or tribunal claims, ensuring a clean break for both parties.
Why Are Standard Settlement Agreements Used?
There are several common reasons why employers offer settlement agreements:
- To resolve workplace disputes: If there’s a disagreement between you and your employer (e.g., over unfair treatment or grievances), the agreement provides a resolution.
- Redundancy situations: Employers often provide settlement agreements during redundancies to formalise the terms of departure.
- To avoid legal claims: By signing the agreement, employees waive their right to bring claims such as unfair dismissal, discrimination, or breach of contract.
- To maintain confidentiality: Many agreements include clauses that prevent employees from disclosing sensitive information about the employer or the circumstances of their departure.
Key Elements of a Standard Settlement Agreement
Every settlement agreement is unique, but most normal settlement agreements follow a similar structure. Here are the key components you can expect to find:
1. Termination Date
The agreement will specify the date your employment officially ends. This is an important detail, as it determines when your notice period ends and when your compensation will be paid.
2. Settlement Payment
The financial compensation offered to you is often one of the most crucial parts of a standard settlement agreement. This payment may include:
- Ex gratia payment: A tax-free lump sum offered as a goodwill gesture.
- Notice pay: Payment in lieu of notice (PILON) if you’re not required to work your notice period.
- Accrued holiday pay: Payment for any unused holiday entitlement.
For more information, see How Your Redundancy Payment is Calculated: A Comprehensive Guide
3. Waiver of Claims
By signing the agreement, you agree not to bring legal claims against your employer. This can include waiving the right to claims for:
- Unfair dismissal
- Discrimination
- Breach of contract
- Redundancy pay disputes
It’s crucial to fully understand the claims you’re waiving and ensure you’re receiving adequate compensation in return.
4. Confidentiality Clauses
Most agreements contain clauses preventing you from discussing the terms of the settlement or disclosing details about your employer. This ensures discretion for both parties. For more details, see Confidentiality in Settlement Agreements – Who Can I Tell?
5. Non-Disparagement Clause
This clause prohibits you from making negative or damaging comments about your employer, colleagues, or the organisation. Similarly, your employer may agree not to disparage you.
6. Legal Advice
Under UK law, you must obtain independent legal advice before signing a settlement agreement. This ensures you fully understand the terms and implications. Employers typically contribute towards your legal costs—this should be clearly stated in the agreement.
For tips on choosing a settlement agreement lawyer, see How to Choose a Settlement Agreement Lawyer.
7. Reference Provision
Some agreements include a clause guaranteeing a reference for future employers. If this isn’t included, you may want to negotiate its addition.
8. Post-Termination Restrictions
Settlement agreements sometimes include restrictions on future employment, such as:
- Non-compete clauses (preventing you from working for competitors for a set period).
- Non-solicitation clauses (preventing you from approaching former clients).
- Non-dealing clauses (preventing you from working with former clients).
- Non-poaching clauses (preventing you from poaching former colleagues).
These clauses should be reasonable and no more extensive in scope than is necessary to protect a legitimate interest of the employer. You should receive consideration (payment) for any new restrictions.
More commonly, restrictive covenants are contained in the employment contract, and the settlement agreement affirms that they will continue in effect.
9. Taxation
The agreement should outline any tax implications for your settlement payment. For example:
- The first £30,000 of an ex gratia payment is usually tax-free.
- Payments in lieu of notice (PILON) are typically taxable.
It’s important to verify the tax treatment of your payment with your legal advisor.
For more details, see Tax on Termination Payments: what you need to know.
What to Watch Out For in a Normal Settlement Agreement
While most normal settlement agreements follow a standard template, there are some key points to watch out for:
- Compensation: Ensure the compensation offered reflects what you’re giving up (i.e., your legal claims).
- Make sure that any confidentiality and non-disparagement clauses are mutual – so the employer can’t make derogatory statements about you.
- Scope of the waiver: Make sure the claims you’re waiving are clearly defined and understood, and that the compensation is proportionate to the value of the claims waived.
- Reasonable restrictions: Post-termination restrictions should not unfairly limit your future career prospects.
- Legal cost contribution: The employer’s contribution to your legal fees should cover the cost of obtaining advice.
How CheckMySettlement.com Can Help
Navigating a settlement agreement can be overwhelming, especially if you’re unfamiliar with legal jargon or unsure about the fairness of the terms. At CheckMySettlement.com, we provide expert legal advice tailored to your situation. Our team of experienced solicitors will:
- Review your agreement in detail and talk you through it to make sure you understand it.
- Discuss with you any claims you might have against your employer.
- Advise on whether you should negotiate for better terms.
- If you would like us to, contact your emlpoyer to request amendments to your settlement agreement.
With our guidance, you can feel confident about signing your standard settlement agreement or negotiating for a better deal.