A settlement agreement is a legally binding contract between an employer and an employee. It typically brings the employee’s employment to an end and waives employee’s right to legal claims in exchange for a financial payment.
While settlement agreements are common in redundancy situations, they are also used in other scenarios. For example, when an employer wishes an employee to leave their role, or when an employee wants to move on and may have grounds for a potential claim, such as one around harassment or discrimination.
The reason that lead the parties to reach agreement are unique but the agreement itself will have many commons terms. Here are some of the most frequently asked questions that are asked by employees on whether the settlement on offer is reasonable.
Is the settlement amount fair?
Naturally, this is the key concern. The answer depends on your personal circumstances, but in general, a settlement should compensate you for the period you’re likely to be unemployed. At a minimum, this should cover contractual and statutory entitlements like your notice and holiday pay and some monetary incentive to enter into the agreement.
Any enhanced amount will vary and your scope to ask for me more will depend on the strength of your bargaining position. For instance:
- Your length of service
- Your employer knows you have been looking for a new job
- If you’ve volunteered for redundancy, you may have less leverage
- Your contribution to the business
- The financial health of the business
- If you’ve been asked to leave because your face “no longer fits” but your performance is strong, you may well be in a strong negotiating position. For example, this is quite a common scenario in City firms when a new senior executive arrives and decides that they want to build their own team or even the team from their previous firm to replace the incumbents.
- Similarly, if you want to leave because you have faced harassment or discrimination, this may increase your scope to negotiate a better settlement.
Our team of top employment lawyers can help you assess what’s reasonable based on your individual circumstances, devise a strategy and support you to negotiate the best possible outcome.
Do I have to pay tax on the settlement?
The first £30,000 of a redundancy is usually tax-free. However, other payments, such as outstanding holiday pay or salary paid during a notice period or garden leave, are subject to income tax and National Insurance in the normal way.
Most settlement agreements include a tax indemnity clause, which means that if HMRC later decides tax should have been paid on part of your settlement, your employer is protected. We’ll explain the implications of these terms in real terms and why you need not worry.
What can I tell a future employer about my departure?
Most settlement agreements include a confidentiality clause, meaning you can’t disclose the agreement or the events that led up to it.
That said, it’s usually possible to negotiate sensible exceptions and we are live to the concerns that you will have to frame the narrative in a positive manner so that you can provide a straightforward reason to a future employer or recruitment consultant.
Can I ask to be classified as a good leaver?
If you hold shares or there are outstanding LTIPs in the firm you are leaving, your entitlement to retain or benefit from the shares or cash may depend on whether you are classified as a “good leaver” or a “bad leaver.”
This status may only be conferred by your firm’s remuneration committee, but it may be possible to lay foundations within the settlement agreement where your performance rating is confirmed to help secure the relevant deferred benefits.
The scope to negotiate will depend on your bargaining position and the circumstances surrounding your exit. This is why getting advice from experienced lawyers could make a big difference.
Can I ask for a reference?
Yes, and you should. It’s always wise to request a reference as part of the agreement. References have changed over the years, and the standard HR reference may be all that your employer is prepared to offer irrespective of why are leaving.
Strangely enough, a reference that waxes lyrical about your achievements but misses key information might be a red flag to your new employer who may infer there’s been a dispute. Sometimes it is best to get an HR reference and seek personal references and testimonials from line managers or happy clients.
Should I use the solicitor my employer recommends and who pays?
You are legally required to take independent legal advice before signing a settlement agreement. Otherwise, it won’t be legally binding.
Employers often suggest a solicitor or provide a shortlist, but you should be free to choose your own.
It’s standard practice for employers to contribute towards the cost of legal advice. The contribution usually covers advice for a straightforward situation, in more complex cases (such as those involving discrimination, whistleblowing or there is a need to seek a release from restrictive covenants) we can often agree an increase from the employer to cover all the legal fees. We will always discuss any additional fees in advance of them being incurred and will do our best to have them met by the employer.
About the author:
Nicola Welchman is a Partner at Bloomsbury Square Employment Law and employment rights specialist. She’s represented employees in workplace disputes for more than 17 years’. She specialises in negotiation strategy, post-termination restrictions and executive compensation as well as undertaking the negotiations, contract negotiation and conducting litigation.
