What Is a Settlement Agreement and Why Do You Need It?

by Tanya July 27, 2022

You’re pulled into a meeting and asked to leave your job.

Your manager explains why the decision has been made and you are left feeling shocked.

Your manager offers you a settlement agreement, but you have no idea what to do next…

Well, you’ve come to the right place. I hope the pointers below can help you.

What is a settlement agreement?

A settlement agreement is a legally binding contract used to end an employment relationship on mutually agreed terms.

By signing the settlement agreement, an employee won’t be able to make legal claims against their employer in the employment tribunal after the termination of the contract. In return, the employee usually gets a sum of money from the employer.

A settlement agreement is essentially a contract that stops employees from bringing claims against their employers.

So you mustn’t sign documents without understanding your employment rights. Especially if you feel like you’ve been dismissed unfairly or that the exit package that the employer is offering isn’t sufficient.

Do I have to accept a settlement agreement offered by my employer?

No, you don’t have to accept the offer that your employer makes. Especially if you think you aren’t getting a fair deal.

What should the settlement agreement contain?

Every settlement agreement will depend on individual circumstances but the standard terms of the settlement agreement are the following:

• The outstanding balance of the salary, notice pay, bonuses, commission and holiday pay of the employee

• A termination payment, tax-free up to £30,000, that will be paid by the employer to the employee for agreeing to terminate the contract

• A Confidentiality or Non-Disclosure clause may be included which is usually of benefit to both parties

• A non-derogatory clause may be incorporated to prevent both parties from saying unpleasant things about each other

• The employee will usually waive most rights that he or she may have against the employer

• A contribution by the employer towards the legal fees

• A settlement agreement must be signed by an independent legal advisor, such as a settlement agreement solicitor.

Will I need a solicitor and do I have to pay for one?

Settlement agreements are not legally binding unless the employee has received independent legal advice about it.

Not only will the solicitor be able to give you legal advice, and help you understand the legal jargon, but they can even deal with the employer directly.

Employers usually agree to pay towards your legal fees and contribution of between £200 and £500 is common.

Make sure that employer contribution is stated in the settlement agreement.

Will the settlement agreement affect my future job opportunities?

A settlement agreement shouldn’t affect your future employment.

In most cases, a settlement agreement can be the best form of exit from a company as you will secure a sum of money, an agreed termination date, and a reference to support you with any future job applications.

Have you ever been unexpectedly fired? How did you handle it?

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The first Millennial blogger in the UK. Twitter @_luckyattitude

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  • Matt

    no i haven’t, but good to know

  • Lexi

    When I was made redundant I was given 3 months worth of pay but I didn’t sign this agreement. Do you think I should of done?

    • Tanya

      No, it’s mainly necessary when you feel that you have been dismissed unfairly. If you think that 3 months worth of salary was fair, then you did everything right ✌?