What All Employees Should Consider Before Signing a Settlement Agreement

  • Denise Rose
  • Monday, September 11th, 2017

Have you been offered a settlement agreement? Here are a few things to consider before agreeing to the terms.

Settlement agreements are generally offered to employees when they are made redundant or if the employer feels the individual is underperforming or guilty of misconduct. It is a document that includes an offer of a sum of money in return for terminating an employee’s employment. A settlement agreement will also outline terms of departure including a waiver of the right to bring claims against the employer.

For some people, being handed a settlement agreement can come as quite a shock. Many individuals who have been put in this position also feel pressured into signing the document and understandably find the whole experience very stressful.

If your employer has recently offered you a settlement agreement, here are some key factors to consider before signing on the dotted line.

Hold on – what exactly is a settlement agreement?

A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between you and your employer which is used to put an end to any type of workplace dispute. It usually involves the termination of your employment – and each settlement agreement will vary.




Settlement agreements also include clauses addressing the following:

  • The payment you will receive.
  • The issues to be settled.
  • Waiving rights to make a claim in an Employment Tribunal.
  • Any holiday entitlement.
  • Relevant tax issues.
  • Gagging and confidentiality clauses.
  • Getting a reference from your employer.

As we previously explained, each settlement agreement will be unique, which is why you must always seek expert advice. It is also worth mentioning that settlement agreements cannot exclude claims for accrued pension rights or latent personal injury.

Just remember – you do not have to sign a settlement agreement and as an alternative you can consider an Employment Tribunal claim against your employer.

The advantages of a settlement agreement

There are advantages to settlement agreements. The benefits include:

  • Avoiding the cost involved in bringing an Employment Tribunal claim.
  • Reducing some of the stress and anxiety involved.
  • Keeping your dispute private and confidential.
  • A clean break and dignified ending to a stressful and difficult situation.
  • Working together to come up with a deal that is right for all parties involved.

Things to consider before signing a settlement agreement

When you are handed a settlement agreement, you may feel pressured to sign it immediately but you should rarely do so. It is crucial to understand the document, and carefully consider various factors including whether or not you are being offered enough money to waive your right to make claims against your employer.



Here are a few things you need to ask yourself before agreeing to anything:

  • Do you fully understand the document terms?
    Settlement agreements include lots of legal jargon. You may find that there are some terms in the agreement that you are not happy with, such as the amount of money you are being offered or a gagging clause (stopping you from bad mouthing your employer). You must speak to a qualified employment lawyer who will explain the document to you, run through your rights and consider negotiating a better deal or amending the agreement.
  • Does the settlement state that you are not allowed to work for a competitor?
    Many employers will include a clause in the settlement agreement that states you cannot work for a company in the same industry and/or deal with customers for a period of time. As you can imagine, this will affect the type of jobs you can apply for in the future and could have a huge impact on how quickly you can find employment elsewhere. It may be that you have only ever worked in the same industry so it is important not to lose your right to carry on doing so.
  • What are you getting in return for losing your job?
    A settlement agreement is supposed to give you something worthwhile in return for not only losing your job but also for your agreement not to make a claim to an Employment Tribunal. If your contract provides for a week or month of redundancy pay for every year you have worked for your employer, and that is approximately what you are being offered, then you may wish to negotiate more for agreeing to the settlement. The redundancy pay is your minimum entitlement so they will only be giving you what you are already owed. You will receive advice from your employment solicitor confirming how generous the offer is.
  • Do you know how much your right to make a claim is worth?
    If you do not already know what your claim may be worth, then you should not agree to waive your right to pursue it. You need to speak to an employment lawyer to understand whether you have any potential claims against your employer, such as unfair dismissal, breach of contract, discrimination, and unlawful deductions from wages. If you have valid claims to make, you can either negotiate a better settlement or take your claim to a Tribunal. Never sign without understanding your rights fully.
  • Has your employer agreed to provide a job reference?
    It is crucial to ensure your employer has agreed to provide a reference to a prospective employer. This should be attached to the settlement agreement. The wording of a reference may be negotiated.
  • Is your employer happy to pay your legal fees?
    You must always receive independent legal advice in order for the settlement agreement to become binding and to ensure your best interests are protected. This is a requirement by law. With this in mind, you need to make sure your employer is happy to contribute towards your legal fees. Most employers offer to pay approximately £250 to £500 plus VAT to cover the cost of the advice you receive. If you do not sign the agreement and decide to take a different route, it is likely that you will have to pay the legal fees that arise from negotiations and further advice – so take this into consideration as well.
  • Will you have to pay tax on the termination payment?
    As a general rule, the first £30,000 of compensation is exempt from tax and NI deductions. However, contractual payments including holiday pay and salary will be taxable. It is always best to give your solicitor a copy of your employment contract with the settlement agreement so they can advise precisely how much of the termination payment is free of tax.
  • Should you negotiate what you are being offered in the settlement agreement?
    The short answer – it depends. If you think the sum of money you are being offered is enough, then you will probably be happy to sign the settlement agreement and move on. But, if you are advised you could claim more, it could be wise to negotiate. You can negotiate on the basis of threatening to make an Employment Tribunal claim if your employer refuses to offer you more compensation. How you negotiate is always up to you, but an employment solicitor will be able to advise you on the best strategy and the prospects of success.
  • What happens if you do not sign?
    The most important thing to remember is that it is not compulsory to sign a settlement agreement. If you think you have a claim for more money than the current offer or feel the terms are otherwise unreasonable, you do not have to sign. Whether you will do better negotiating or making a claim at an Employment Tribunal will usually require legal advice and depend on what your lawyer suggests is the best course of action to take. It is also possible that you employer will threaten to withdraw their offer if you do not accept it, forcing you to make a claim. Having said that, most employers prefer to settle employment disputes out of court and in a dignified manner.
  • Do I need to seek independent legal advice?
    The answer to that question is always yes. The settlement agreement is a legally binding document that can only be recognised in law when an employment lawyer has certified it. A qualified employment solicitor will also identify whether there is any merit in a claim because you have been treated unfairly in some way. Once the settlement agreement is signed, there is no going back – so it is crucial that you receive legal advice before taking any action.

Deal or no deal?

When confronted with a settlement agreement, you need to be sure that there are no future claims that you can make against your employer. You also need to know your legal rights and speak to an employment lawyer for advice and answers to all the questions you may have. Remember, there is a three (3) month time limit if you intend to issue an unfair dismissal claim at the Employment Tribunal. If you do not have grounds for making a claim, your independent employment solicitor should help you negotiate the terms and attempt to settle the dispute out of court.

For Advice on a settlement agreement speak to a DPH Legal specialist employment solicitor. Call us or complete our Contact Us form today.