What is a Settlement Agreement?


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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 holidays 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 your employment lawyer as part of the agreement. For help to find an employment lawyer who helps with settlement agreements see our partners section to see our list of recommended Employment Layers. Further employment law firms 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 your 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 help 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

At Personal Career Management whilst we can’t provide legal advice, will be happy to discuss how outplacement support can help you, what programme will be most suitable for you and how to negotiate it into your agreement in the most cost effective way. Just call our specialist outplacement team on 0345 686 0745 (internationally on +44 1 753 888995 or fill in the contact form below.