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How to negotiate a good settlement agreement

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Settlement agreements were introduced in 2013 as a way for employers to fast-track employees out of their company without the risk of legal action from the employee. They are commonly used in cases of redundancy or where an employee is underperforming and involve offering the employee a financial payout in exchange for leaving the company and agreeing not to take legal action.

For employers, settlement agreements can make it easier to remove workers who are no longer valuable, while for employees they provide a way to get a financial settlement upfront, without the need to go to an employment tribunal. This is usually faster, less expensive and less stressful for both parties.

In this article, we will look at how you can negotiate a good settlement agreement, both as an employer and as an employee.

How to ensure the settlement agreement is valid

To be legally binding, a settlement agreement must meet the following 3 conditions:

  1. It needs to be in writing.
  2. It should be related to a specific claim or claims the employee could bring against the employer.
  3. The employee needs to have received legal advice before signing to ensure they fully understand the agreement.

What employers need to consider when creating a settlement agreement

As an employer, your priority in negotiating a settlement agreement should be:

  • Getting the employee to agree to the settlement without a fight.
  • Not paying more than you need to.
  • That all possible types of claim they could bring are considered.
  • That the employee will not take any action that harms your business interests e.g. attempting to take clients with them when they leave.

When trying to create a fair settlement agreement that protects your interests and that your employee will be likely to accept, it is worth bearing in mind:

  • Employees do not have to pay to take a claim to an employment tribunal, meaning they may consider they have “nothing to lose” if they feel your settlement agreement offer is not generous enough.
  • Employees have the right to be paid for any unused holiday entitlement.
  • You do not have a legal right to deduct money if the employee has exceeded their holiday entitlement, unless this was specified in their contract.
  • You do not have to state the reason for termination. If the employee is being let go for poor performance, they may be more likely to agree to the settlement if this is left out of the agreement.
  • You are not obliged to keep the offer of a settlement agreement open for any length of time.

What employees need to consider before signing a settlement agreement

As an employee, your priorities in negotiating a settlement agreement should be:

  • The financial settlement is fair.
  • Your employer agrees to provide a good reference.
  • If a reason is given in the agreement for your termination, that this will not conflict with the employer being able to give you a good reference.

During negotiations, it is worth bearing in mind:

  • Your legal rights and how much you would be likely to receive as a settlement if you took your case to an employment tribunal.
  • Employment tribunal procedures generally take at least 6 months, so even if the settlement agreement offered is not as generous as you might like, it may be worth accepting rather than spending months waiting for a resolution.
  • The first £30,000 of any termination payment will normally be tax-free.
  • If you are placed on “garden leave” (i.e. still technically employed and paid your salary, but not required to attend work) you will be subject to the terms of your employment contract until your employment officially ends.

Get expert legal help with your settlement agreement

Whether you are an employer looking to use a settlement agreement to remove a member of your team, or an employee who has been offered a settlement agreement, getting the right legal advice and representation is essential.

An expert employment law solicitor will be able to ensure your interests are protected and that all likely eventualities are considered, giving you peace of mind that the matter will be truly resolved once the settlement agreement is signed.

Slade Legal is a well-established law firm operating out of 3 offices across Oxfordshire and the Thames Valley. Our highly experienced employment law solicitors can help you with all aspects of employment law, including negotiating settlement agreements, whether as an employer or employee.

To find out more, or to book a consultation with one of our expert employment law solicitors, please get in touch.