If you’re an employee facing redundancy and your employer has mentioned a ‘settlement agreement’, you might well be wondering what that means, what they are and what are the implications of signing one?
With unemployment likely to rise due to the Covid-19 crisis, more and more people will be facing these questions over the coming months and years.
Here we explain exactly what a settlement agreement is and how we can help should you be presented with one.
What is a settlement agreement?
Settlement agreements are contracts that stop employees bringing claims against their employers. Sometimes these are called by a few different names. These include:
- Compromise agreements
- Gagging clauses
- Termination agreements
- Mutually agreed resignations
- Ex-gratia payments
- Golden goodbyes
The correct legal name for any of these contracts is ‘settlement agreements’, however.
When are settlement agreements used?
Settlement agreements are a legal contract between you and your employer. They are usually offered when an employee faces redundancy, or when an employer feels that an employee is guilty of misconduct or is seriously underperforming.
The document will usually contain an offer of a sum of money in return for terminating employment. The agreement will outline the terms of departure and will usually include a waiver of the right to bring claims against the employer.
Settlement agreements can be used to terminate your employment or to settle an ongoing claim you are bringing in an employment tribunal or a court.
Why might I choose to sign a settlement agreement?
A settlement agreement can offer both employer and employee a clean break, but it’s important that it’s given proper consideration before signing.
Some of the potential benefits for the employee are:
- You can reach mutually agreed terms and part amicably.
- They avoid the sometimes considerable costs of an employment tribunal.
- Retaining a reference. In a redundancy situation it may be possible to negotiate the contents of a reference.
- Tax free. The first £30,000 of any settlement payment is free of tax.
- Costs are often met by the employer capped at no more than £500 plus VAT. Before signing a settlement agreement it’s important to seek impartial legal advice. Most settlement agreements will contain a clause that commits the employer to paying reasonable costs.
Do I have to accept a settlement agreement?
No one has to accept a settlement agreement. However, your employer may still be able to sack you fairly, and you may not receive a better offer. A solicitor with experience in employment law will be able to advise whether it is advisable to accept the offer or consider a further claim.
Never sign a settlement agreement without seeking advice
Settlement agreements are legally binding documents in which you waive most of your rights. They should never be taken lightly, nor should they be signed without proper consideration.
It’s important to seek professional advice before you sign any agreement. At Murria Solicitors we regularly advise Client’s on settlement agreements, giving our clients peace of mind before they sign.
For more advice about settlement agreements, contact us today.
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