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How do I Negotiate a Settlement Agreement?

It is a sad fact that one of the outcomes of the pandemic is that many hundreds of thousands of people will lose their job as a result.  Employers will seek to enter into Settlement Agreements with members of staff.  The purpose of this blog is to try and highlight some of the issues that arise when entering into a Settlement Agreement and how employees might try to negotiate better deals if they are able to do so.

A Settlement Agreement (formerly known as a Compromise Agreement) is a document where an employee or worker agrees not to pursue certain statutory employment tribunal claims against an employer.  As you might expect from a legal document there are certain conditions that must be met. These are:-

  • The agreement must be in writing
  • The agreement must be signed by both parties The employee must have received independent legal advice on the agreement and in particular on its affect on their ability to purpose the statutory rights in question
  • The legal advisor (to the employee) must be identified in the agreement
  • The legal advisor must have insurance in relation to the advice
  • The agreement must state that the conditions relating to Settlement Agreements in relevant legislation have been met

Only certain statutory claims can be settled by a Settlement Agreement – a few of them (by no means all- as they are extensive ) are listed below :-

  • Claims under the Equality Act / equal pay
  • Claims for pregnancy, paternity, sex, gender reassignment, civil partnership status, or maternity discrimination
  • Claims for race, colour, nationality, ethic or national origin discrimination
  • Disability discrimination
  • Claims for harassment relating to sexual orientation
  • Claims for religious or belief discrimination
  • Claims for age related discrimination
  • Claims for unfair dismissal, unauthorised deductions from wages
  • Claims in relation to national minimum wage.

What do Settlement Agreements Contain

A Settlement Agreement will usually contain an ex gratia payment (or “sweetener” payment) offered to  an employee not to bring an employment claim against their employer.

If an employee is faced with a Settlement Agreement discussion with an employer, there are a number of aspect that should be considered open to negotiation.

These include:-

  • Contractual payments – All employees should have received a contract of employment which has provisions in relation to termination of employment.  An employee should anticipate that they will receive final salary payments including any benefits, any accrued and untaken holiday pay and notice pay (unless an employee is working their notice)
  • Ex gratia payment - This can be a payment that seeks to compensate an employee for future loss of earnings until a new job is found.  The first £30 000 of such a  payment can be tax free.  Tax will be deducted from any sum over £30,000.00 so this has to be borne in mind when negotiating

Extension of Benefits – Are there any benefits as part of an employment package?  These could include company cars, private health, pension contributions.  Again employees may wish to try and negotiate that these are extended for a specified period.

Reference – These days getting a reference from an employer can be quite difficult.  Many employers will only provide information relating to the periods which were worked.  A Settlement Agreement can be used to negotiate and draft a more full and comprehensive reference which can be attached to the agreement.  This gives employees some assurance what the reference will look like as and when another job is obtained.

No bad mouthing – There will normally be a term in the Settlement Agreement to prevent either party from making disparaging remarks about each other.

Outplacement Services – There may be some assistance an employer can provide to help make the employees career transition easier.  This can include career guidance and CV writing / review.  Such services will be provided at the cost of the employer.

Bonus payments – Are there any bonus payments due under the contract?  Quite often bonus clauses in contracts will be discretionary.  However, they are always worth negotiating if an employee would normally receive a bonus or an employee is missing the benefit of  one just because they are leaving before it would be paid.

Shares – Does an employee have any shares or share options with the company?  If so, what are the values of those shares?

Legal Fees

There will be a provision in the agreement that the employer will contribute towards the employee’s legal advice.  Not surprisingly, many employers  want to provide a nominal figure and will expect the employee to make up any difference. 

Sometimes if the agreement is badly drafted or there needs to be some degree of negotiation about the contents, legal fees can rack up.  There has been much legal debate regarding employer’s cost contributions in Settlement Agreements.  Recently the Employment Appeal Tribunal considered the contribution of an employer of £500.00 plus VAT in the case of Solomon University of Hertfordshire. HHJ Richard at paragraph 110 of the judgment stated that whilst £500.00 plus VAT might be enough to cover advice on the “terms and effect” of the proposed Settlement Agreement it was “wholly unrealistic” for a solicitor “to advise on the merits of the Claimant’s claim and likely award of compensation” for that amount which “would require reading and considering on quite a different scale”.

If I can assist helping people with Settlement Agreements, I am more than happy to do so.  Please contact me on telephone 01295 661 487

Mobile 07972 494945


Ruby Rai

Rubi Rai is a senior associate at Brethertons and works exclusively in the employment law team.