What Is a Settlement Agreement and Why Have I Been Given One?
If you’ve been handed a settlement agreement by your employer, it’s completely normal to feel uncertain or even worried about what it means. This article will help you understand what a settlement agreement is, why you might have received one, and what you should consider before signing anything.
What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between you and your employer. It usually brings your employment to an end on agreed terms and prevents you from making certain claims against your employer in the future.
In Scotland, as in the rest of the UK, these agreements are used to settle workplace disputes or end working relationships in a way that avoids going to an employment tribunal.
Why Have I Been Given a Settlement Agreement?
There are many reasons why an employer might offer you a settlement agreement. Some common situations include:
Redundancy
Your role might be at risk due to company restructuring or downsizing, and your employer may offer a settlement agreement as part of the redundancy process. This can offer you better financial terms than a statutory redundancy package.
Workplace Disputes
If there has been a breakdown in the working relationship – such as a grievance, disciplinary issue, or ongoing conflict – your employer might use a settlement agreement to draw a line under the situation and agree an exit on mutually acceptable terms.
Ill Health or Long-Term Absence
If you’re unable to return to work due to ill health, a settlement agreement may be used to bring the employment relationship to a dignified end with financial compensation.
Avoiding Tribunal Proceedings
Employers may prefer to resolve disputes privately rather than risk the time, cost and publicity of an employment tribunal. A settlement agreement prevents future legal action about the issues covered in the agreement.
What Does a Settlement Agreement Usually Contain?
Every agreement is different, but most will include the following:
A Compensation Payment
This is a sum of money paid to you for agreeing to give up certain legal rights, such as the right to claim unfair dismissal. It is usually tax-free up to £30,000 if it meets HMRC rules.
Notice Pay
You may receive pay in lieu of notice if you’re not working your notice period. This is usually subject to tax and National Insurance.
Waiver of Claims
You will usually be agreeing not to make any employment-related legal claims against your employer, such as unfair dismissal, discrimination, or breach of contract.
Reference
Some agreements include a basic reference which your employer agrees to provide to future employers. This can give you reassurance about what will be said about your time with the company.
Confidentiality
It’s common for a settlement agreement to include a confidentiality clause preventing you from discussing the agreement or the circumstances leading up to it.
Return of Property
You’ll usually be expected to return any company property such as laptops, mobile phones or security passes.
Do I Have to Sign It?
No. You are under no obligation to sign a settlement agreement. You should not be pressured or rushed into making a decision.
You are entitled to take time to consider it.
Employers should give you a reasonable period to take legal advice – usually at least 10 calendar days.
You should never sign without independent legal advice.
For a settlement agreement to be legally binding, you must take advice from a solicitor or an authorised adviser. Your employer will usually contribute to or cover the cost of this advice.
What Should I Do Next?
If you’ve been offered a settlement agreement, here’s what you should consider:
Speak to a solicitor who specialises in employment law
A solicitor will check if the offer is fair and explain what you’re giving up in exchange. They may also be able to negotiate a better deal for you.
Think about your future plans
Does the financial offer give you enough time to find another job? Does the reference help you move forward?
Ask if anything is unclear
Settlement agreements can be full of legal language. Your solicitor can explain the small print and help you understand your rights.
Final Thoughts
Being handed a settlement agreement can feel daunting, but it doesn’t always mean something negative. In many cases, it’s simply a practical way to move on from a difficult or changing situation with some financial security.
Always remember: you have the right to legal advice, and you should never feel pressured to sign anything you don’t fully understand.
If you have received a Settlement Agreement from your employer or you simply wish more information, then please contact our experienced Employment solicitors on 01259 723 201 or contact help@randa-fa.co.uk and we would be delighted to assist.
