Settlement agreements allow employers to end the employment relationship by mutual agreement with payment of an agreed lump sum and possibly other benefits.

It draws a line under everything that has gone before, enabling employer and employee to move on.

As well as being used in the event of conflict or breakdown of relations between an employer and employee, you may be offered a settlement agreement as an alternative to going through a redundancy procedure.

If an employer needs to reduce staff numbers, it must go through a fair redundancy procedure before deciding which staff are redundant, consulting affected employees and considering whether suitable alternative employment is available. Using a settlement agreement instead can shortcut this time-consuming process.

The important thing to remember if you are offered a settlement agreement is that this is a legal document and by signing it you are foregoing any right to bring legal action against your employer.

So if you do believe you have a claim of any sort against your employer, think very hard before you sign the agreement and seek legal advice as there is no going back.

What should you do if you are offered a settlement agreement?

  • Get good legal advice. Without independent legal advice, the agreement will not actually be binding. Very often your employer will pay all or some of your legal costs, so remember to ask them whether they will pay your legal fees.
  • Work out your finances. Normally the first £30,000 is tax-free but payment in lieu of notice and notice pay generally is subject to usual deductions. This can’t now be fudged. Employers are required to tax as earnings the part of a termination payment that is equivalent to the earnings you would have received had your notice period been worked in full.
  • Be discrete and don’t tell everyone about the agreement. It is usually a term of the agreement that no party will discuss that it even exists, let alone the terms themselves.
  • Don’t panic! You may feel shocked, upset and worried as you turn your mind to losing your income and searching for another job, but try not to panic. Get the support of a qualified employment solicitor to ensure you get good advice and the help you need to negotiate the best possible deal.

For advice on settlement agreements, whether you are an employer or employee, email Laura Franklin, employment solicitor, at laura.franklin@beswicks.com or phone 01782 205000.