Termination agreements, compromise agreements, gagging clauses, mutually agreed resignation, ex gratia payments, golden goodbyes… these are just some of the terms that are used to describe these contracts which stop employees bringing claims against employers. The proper term is “settlement agreement”.
The purpose of a settlement agreement is for an employer and an employee to agree terms under which the employee waives (or gives up) their right to bring certain claims against the employer. They can be used to terminate your employment and also to settle a claim you are bringing in a court or employment tribunal.
A settlement agreement can be suggested by either an employer or an employee as a way to part company on agreed terms.
Here we have collated answers to the most common questions we are asked but if you would like to discuss your particular circumstances free, in confidence and without obligation, click here to contact us.
What’s in it for me?
It’s important that the deal struck is fair. Each case is different; one person might be looking for money but another might need a good reference or even reinstatement in their job after being sacked. Most settlement agreements result in a “clean break” – that is where the employee parts company with the employer – but sometimes the employment relationship continues afterwards. Here are some examples:
- Your post is redundant and your employer is using a settlement agreement to avoid having to go through a consultation process. You might not get any extra redundancy pay that you would have been entitled to under your contract (or by way of statutory redundancy payment), but in return for signing the agreement you might be paid in lieu of working your notice.
- Your employer has evidence that you have committed gross misconduct or is concerned that your performance is inadequate. You are offered a settlement agreement as an alternative to being dealt with in line with the normal procedure, in return for you going quietly. In this scenario, rather than money, your employer might offer to provide you with a basic reference, allowing you to find a new job without the stress going through a hearing or risking a dismissal on your record.
- You have brought an unfair dismissal claim against your former employer. The evidence is overwhelmingly in your favour and the company wants to avoid going to the employment tribunal. A settlement agreement can be used to settle the claim for an amount agreed between the parties. This might not be for the full value of the claim, because the parties often recognise that there is always a possibility that you would have lost your tribunal claim.
- You have brought a discrimination claim against your employer. The company is adamant that the claim is false, but might be prepared to settle the claim out of court under a settlement agreement to save the cost of defending it. They may offer only a fraction of the potential value of the claim and certainly no more than it would have cost them to defend it. In some cases, you may be able to keep your job.
- You have a terminal illness and your health is failing. You are classed as a disabled person and as such are protected against disability discrimination under the Equality Act 2010. When you reach the stage that you can no longer work (even when your employer has made adjustments for you), you might agree to resign in return for an ex gratia payment. Ex gratia means money to which you have no contractual entitlement to. To ensure you won’t later decide to bring a claim of disability discrimination, your employer might ask you to sign a settlement agreement.
Do I need independent legal advice before I sign? Who will pay for my legal advice? What will it cost?
Settlement agreements are not legally effective unless the employee has received independent legal advice about it. Employers usually agree to pay towards your legal fees but they won’t necessarily cover all your costs. A contribution of between £200 and £500 is common but if your situation is complex or your solicitor needs to negotiate with your employers on your behalf, then your legal fees might be higher than that. It is sometimes worthwhile funding the additional legal fees yourself in order to achieve a better deal.
Your solicitor will discuss their fees with you before they start acting for you and they mustn’t incur further cost if you’ve asked them to stop work when fees reach a particular level.
I’ve been offered a settlement agreement – do I have to accept it?
No. But depending on the circumstances your employer might be able to sack you fairly anyway. If you turn down the offer, you might not get a better one. If you feel you’ve been treated badly, you could still bring a claim after turning down a settlement, but you might not be awarded as much money as you were offered initially. Remember, the terms of a settlement must be agreed by both parties and your solicitor will be able to advise you about what would be reasonable in your circumstances.
If you take advice from a solicitor about a settlement agreement, but you decide not to accept the terms offered, then you may still be liable for all your solicitor’s fees. That’s because your employer’s commitment to contribute towards your legal fees is only valid if you sign the contract. Your solicitor will explain the consequences of this to you.
What claims am I settling?
Most settlement agreements are intended to cover every possible type of claim you could bring against your employer. That means you will waive/surrender your rights to bring statutory and contractual claims and claims for personal injury.
There are very few exceptions to this: some types of claim cannot be waived even with a settlement agreement. The most common example is personal injury where you are unaware of the injury at the time of signing the agreement. For example, if you were unwittingly exposed to asbestos at work, the settlement agreement wouldn’t prevent you from bringing legal action against your employer if you discovered years later that you had become ill with asbestosis caused by that exposure.
When you sign a settlement agreement, you should assume that it draws a line under everything that has happened between you and your employer and that you won’t be able to bring any type of claim against them.
Why does the settlement agreement include a long list of irrelevant claims?
Most employers (and their solicitors) use template settlement agreements which are designed to be a one-size-fits-all. If there are some claims that are obviously more likely to apply in your circumstances, these are sometimes referred to separately in the agreement. They are sometimes called the “particular claims”. Unfair dismissal is the most common one, but if you were resigning in connection with a health problem, then disability discrimination would be a “particular complaint” too.
Apart from the “particular claims”, employers will also try to ensure that there are no other possible claims you could bring against them in future. Template or precedent settlement agreements often contain a list of all known types of employment claim – even ones that couldn’t possibly apply to you. For example, most agreements retain wording relating to pregnancy and maternity regardless of your gender. They might refer to rights of part-time workers and the right to be consulted in relation to redundancy even if you have never been in those situations.
It doesn’t matter if most of the listed claims don’t apply to you. The important is to understand that you won’t be allowed to bring any claims against your employer.
Why is my employer trying to gag me?
Confidentiality clauses are common in settlement agreements. They usually mean that the parties promise not to make damaging statements about each other. This would prevent you making harmful comments in the press or on social media about your employer – even if you’re telling the truth. It might also prevent you from reporting malpractice as a whistle-blower, so your solicitor should carefully explain the implications to you.
What’s with legal jargon?
For a settlement agreement to have legal effect against the employee, it needs to refer to specific sections of employment legislation. It will also need to include clauses that say you are waiving/surrendering some (or all) of your employment rights.
The agreement states my “reason for leaving” – does it need to be accurate?
The reason for leaving written in a settlement agreement doesn’t usually matter. Especially where both parties are bound by confidentiality, it can be helpful to agree what you will say to your friends/colleagues and prospective future employers about why you left. Common reasons are “redundancy” and “mutual agreement” but some agreements don’t mention the reason for leaving at all. It is important to establish what your employer will tell prospective future employers about your work and why you left – for example by agreeing the wording that will be used in any reference they provide.
What’s an “agreed reference”?
Part of a settlement agreement can be a promise by your employer that if they are asked to provide a reference about you, they will use an agreed form of words. The agreed wording should be included within the settlement agreement – sometimes as an appendix.
In some circumstances you might be happy with a very basic factual reference, but a full descriptive reference about your skills and achievements is usually preferable. The agreement should make clear that if your former employer is asked to comment about you verbally, or to fill in a tick-box form about you, the information they provide will be no less favourable towards you that the agreed wording.
What’s the role of ACAS in settlement agreements? What’s the difference between an ACAS agreement (COT3) and a settlement agreement?
ACAS stands for the Advisory Conciliation and Arbitration Service. ACAS don’t need to play any role in settlement agreements. They provide free conciliation and advice service by telephone to employers and employees. ACAS can settle employment tribunal claims (and potential claims) using a special type of agreement called a COT3. The parties to a COT3 don’t need to be represented by solicitors.
Apart from a settlement agreement, a COT3 is the only other legally effective way that an employee can waive/surrender their employment rights.
ACAS agreements are usually much simpler and less comprehensive that settlement agreements. There are limitations to the types of claim that may be settled using an ACAS agreements and this is why employers often prefer to use settlement agreements.
For more information about ACAS, click here.
How do I negotiate a better deal?
Your solicitor will work with you to formulate a strategy for the negotiation. Here are some tried and tested tips that you can use in any negotiation.
- Think about your opponent’s motivations and anxieties; your employer might be worried out the expense of defending litigation, or about bad publicity. Or they might be anxious not to gain a reputation for paying people off, so your solicitor could suggest changes to the agreement to give them extra reassurance that you will keep the deal confidential.
- Keep your cool and try not to let things get personal; let your solicitor know if you find your employer’s behaviour underhand or oppressive.
- Be realistic but don’t be afraid to ask for what you want, especially if it’s not just about the money. For example, employers will sometimes provide a written apology as part of a settlement agreement.
- Aim high but be prepared to compromise; to strike a deal both sides will need to feel that it’s fair.
Will I have to pay tax on my settlement payment?
Most settlement payments under £30,000 scan be made tax-free. The tax treatment of notice pay is more complicated and you will need to discuss your particular circumstances with your solicitor.
Even where the parties are agreed that your settlement payment isn’t taxable, it’s common for employers to ask for a tax “indemnity” as part of the settlement agreement. That means that if HMRC decide that any tax is due, you will be liable for it. The indemnity will usually say that if HMRC claim the tax from your employer, you will have to reimburse your employer.
My settlement agreement says “without prejudice” – what does that mean?
It means the draft agreement is off-the-record and it cannot be shown to a court as evidence of admissions against either party. The legal concept of “without prejudice” is based on the principle that it’s helpful for parties to settlement discussions to speak freely, knowing that anything they say to try to settle the matter won’t be used against them should the negotiations fail.
The agreement should say that once it has been signed by all the parties, it becomes “open”, which is the opposite of “without prejudice”.
Using the words “without prejudice” in a document will not necessarily give it this kind of legal protection – it must also be a communication made in a genuine attempt to settle an existing dispute.
Does it matter that there are parts of the agreement I don’t understand or cannot comply with?
It is essential that you understand everything in the agreement and if there is anything you won’t be able to comply with (or any term which you have already breached), you need to discuss it with your solicitor.
For example, you might have told colleagues about your negotiations before you saw the confidentiality clause and realised you were supposed to keep the existence of the agreement confidential. If you sign up to a clause that you have already breached (or if you breach the term after signing it) and you employer finds out about it, they might argue that they no longer have to fulfil their side of the bargain. They might refuse to pay the settlement payment or even try to reclaim money they have already paid to you.
If you have been offered a Settlement Agreement, or if you want to obtain a Settlement Agreement from your employer, please contact us to arrange a free, no-obligation consultation with a solicitor.