Settlement Agreement Guide

What is a settlement agreement?

A settlement agreement (previously known as a compromise agreement) is an agreement between you and your employer covering your exit terms from your organisation and is legally binding once signed by both parties. An employer will offer it in a number of circumstances, primarily to avoid future litigation but also where the current contract doesn’t protect them sufficiently; following a breakdown between the employer and employee; or most commonly where a redundancy situation has arisen.

The settlement agreement can include several elements:

  • Your notice period and whether you will work it or not
  • Your final salary payment details
  • Any other payments such as payments to do with bonuses, unused holiday etc.
  • Help the company will pay for to help you get back into work, called outplacement
  • Any terms to do with non compete clauses
  • References to accompany your departure and any agreed announcement

In signing an agreement you forgo your right to future claims against the company and the agreement is designed to be a full and final settlement between you and your employer.

See also: What is Outplacement?

What must they provide?

You will have legal rights which an employment lawyer can advise you on. The company will usually provide the funding for this as part of the agreement. For help to find an employment lawyer who helps with settlement agreements see our partners section to see companies we recommend. Further companies can be found in our free career resources section.

How to negotiate your settlement agreement

The first thing to bear in mind is that this is a negotiation and what you are offered at the outset, as generous as it may be, is unlikely to be the best deal you can get. You should also take comfort in knowing your employment lawyer is used to negotiating settlement agreements and will do so on your behalf which is helpful particularly as, no matter what the reason for exit, you’ll still want to keep on good terms with your employer.

It is useful before starting to negotiate your settlement agreement, to provide your employment lawyer with a copy of your contract of employment and any correspondence to do with your exit, bonuses etc.

There will be many aspects to your settlement agreement negotiation but some points to remember:

  • Your first £30,000 will usually be tax free
  • Think how long it will take you to get back into work – will the payments cover this period? A senior manager can often take 6 months to get back into work. Outplacement support can get you back into work quicker and into a job more aligned to your talents
  • Your employment lawyer should advise on how the payments can be made in the most tax efficient way. Outplacement is tax free as part of a settlement agreement and won’t come off your £30,000 allowance
  • Work out what you want out of the agreement first and be prepared to compromise on some small points to get what you want
  • Be careful about restrictions placed on you to do with future work. Restrictions whilst protecting your employer, may impede your ability to work for a competitor; work elsewhere in your industry; or even set up your own business

Why include outplacement?

There are lots of reasons why getting outplacement services provided for you as part of your settlement agreement is a good idea:

  • You’ll be able to review your future options with someone independently to make better, more informed decisions about your next move
  • You’ll have professional help with putting your job search campaign together including your CV, networking etc. And if you haven’t been in the job market for some time, they’ll make sure your self marketing materials are up to date
  • You’ll have resources available to you such as information on companies, job alerts and market intelligence essential for a modern job search campaign
  • Outplacement services are Tax free as part of a settlement agreement so including it now rather than after a few months trying it alone can save you thousands

Some other things to remember:

If your company offers you their outplacement provider, you can still shop around yourself and choose your own.

If the company won’t include outplacement as part of your final settlement and you want outplacement support, then ask them to include it on your agreement and for them to pay the outplacement provider direct and then deduct the ex VAT cost of the programme off your final salary payment. It costs the company nothing and as a minimum will save you the VAT and could also save you the taxable element as well. For a higher rate tax payer, the saving could be close to 50% of the outplacement cost.

What type of outplacement programme should be included?:

One that suits your needs. You may be unclear with all that’s happening exactly what you want, so give us a call and we can discuss with you your thoughts and how your programme can be structured around your needs. At Personal Career Management you’ll have a truly tailored personal outplacement programme that will work for you.

How we can help

Personal Career Management can help you with your settlement agreement in a number of ways, and at any stage are here to help you if you wish to give us a call:

  • We can discuss with you on the phone and at an initial meeting which is free of charge, which outplacement programme you should ask to be included on your agreement. Our Outplacement Services section will give you a guide.
  • Once agreed with your company, simply let us know what programme has been agreed and the HR departments details and we’ll do the rest. Once they’ve confirmed back to us, your programme can commence.

Contact us

For more information on our outplacement programmes or for settlement agreements call 0345 686 0745 or fill in the form below and one our team will be in touch.

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    The information contained on this page is for general guidance purposes. For more specific legal advice you should contact an employment lawyer.

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