MacNairs + Wilson

5 minutes reading time (1019 words)

Settlement agreements - what do they mean?

Settlement agreements are a way for employers and employees to come to an agreement that allows them to part terms in an amicable manner that is beneficial to both parties.

Settlement agreements vs. Compromise agreements

If you are an employee who is underperforming at work, or if you are in a dispute with the person that employs you, then there is a way for you to leave the business on terms that suit both you and your employer. Known as a ‘settlement agreement’, they are a mechanism introduced in 2013 by former business secretary Vince Cable as a way for employees and employers to agree parting terms in a way that suits both parties.

Settlement agreements are a simplified and renamed version of what was known as a ‘compromise agreement’, something which was around for many years before the introduction of settlement agreements.

A compromise agreement was a legally binding document which had the full details of a deal which has been agreed between you and your employer. Both you and your employer had to sign the document once it had been completed. Once the document had been signed, it meant that you were no longer able to bring any claims against your employer. Due to this, it was important to make sure that you seek legal advice before you sign, to ensure that you were protected. A settlement agreement works in much the same way as a compromise agreement did, therefore it is still important to seek legal advice before signing any settlement agreement.

The main difference between a compromise agreement and a settlement agreement is that any offer or discussions between you and your employer about a settlement cannot be used in any unfair dismissal claims if you are brought to an employment tribunal. This means that your employer can speak openly to you about terminating your contract before any disciplinary proceedings take place. 

Previously, speaking to an employee like this could have been used as evidence in claiming constructive dismissal. To approach an employee who was not facing a disciplinary process and speak about ending your employment would mean that they could use this to claim constructive dismissal by saying that their continued work is untenable.

What to do when faced with a settlement agreement

If your employer engages you in discussion about a ‘settlement agreement’, then you must think about whether you are willing to accept the offer, and if so, what are you looking to get out of the agreement. The most important thing to remember is that you cannot be forced into accepting any settlement agreement, and in refusing to accept this, you will maintain all your employment law rights. If you decide, however, that you wish to enter discussions with your employer about a settlement, then you must make sure that any compensation payment will sufficiently cover any future loss of earnings while you look for a new job. If you were to take the case to an employment tribunal and win a claim for unfair dismissal, this is how they would calculate your compensation. It is important to make sure that a compensation payment is worth as much as you would win at an employment tribunal, as in entering into a settlement agreement, you are forgoing the right to make any claims against your employer in future.

If you do not already have another job to go to, it is difficult for you to judge how long you may be out of work for. A payment which is equal to roughly six months of your salary is generally considered to be a good settlement. It is important to remember that the first £30,000 of any settlement payment is able to be paid without any tax deductions or contributions to national insurance. Offers will depend on the circumstances which have led to the settlement agreement discussions, and the whether there is any strength to the claims you may have.

You must make sure that your employer agrees to give you a positive job reference, even if it is only factual, something which is attached to your settlement agreement. Employers are not legally bound to provide a reference for you, therefore if you have worked at a business for a long time, it is important to ensure you leave with a reference. You should equally ensure that an employer is not able to speak ill of you after you leave the company, something which they will most likely ask you to do too.

If you work in a company which offers end of year bonuses, then you may not qualify if you leave in the middle of the year. You may wish to come to an agreement with your employer about the payment of these bonuses, even if it is only a partial payment.

There are a number of areas which you should take into consideration when negotiating a settlement agreement with your employer, which is why it is recommended that you always seek a professional opinion before signing any contract.

Is it a good thing?

Any measure which allows employees and employers to have serious and important discussions without fear of repercussions is a good thing. Employers are able to speak openly to their employees without worrying about facing an employment tribunal, which is an improvement on the old compromise agreement. Employees should always be wary of employers who look to take advantage of the new rules and sign agreements which are unfavourable to them, which is why professional opinion is always advised before signing any agreement.

The flip side to this is that while the discussions provide a way to resolve issues, it will more than likely mean that your employment will be over, one way or another. Although you always have the right to reject any settlement agreement, it is hard to remain at a job for long when you realise you are no longer wanted there.

Contact our Settlement Agreement Lawyers Glasgow and Paisley

For lawyers who are experts in dealing with settlement agreements, call Macnairs + Wilson Solicitors today on 0141 551 8185, or complete our online enquiry form.

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