The Hidden Risks of Settlement Agreements: Why Employees Should Seek Legal Advice

When employment relationships come to an end, it’s now increasingly common for employers to offer a settlement agreement to employees. While these agreements are a legitimate way for employers to resolve disputes or conclude employment relationships without litigation, they come with serious risks that employees may not fully understand.

As an employment law solicitor, I frequently see employees who are asked to sign away their rights without fully grasping what they’re agreeing to. In this blog, I’ll explain some of the hidden dangers in settlement agreements, why employees should approach these agreements with caution, and the critical importance of seeking legal advice before signing.

What is a Settlement Agreement?

In simple terms, a settlement agreement is a legally binding contract between an employee and employer that outlines terms for ending the employment relationship. These agreements typically involve an offer of payment from the employer in return for the employee waiving their rights to bring future claims against the employer. Settlement agreements can cover a range of issues, including unfair dismissal, discrimination, and redundancy.

While these agreements can provide a quick resolution and a financial incentive, they are far from straightforward. Employees often find themselves agreeing to terms without understanding the full scope of what they’re giving up.

Risks and Dangers of Settlement Agreements for Employees

1. Waiving Legal Rights Without Realising It

One of the main features of a settlement agreement is that it usually includes a waiver of the employee’s rights to bring claims against the employer. This could include claims of unfair dismissal, discrimination, harassment, or breach of contract. Many employees don’t fully understand that signing a settlement agreement generally means they cannot bring these claims in the future – even if new issues arise related to their employment.

2. Inadequate Compensation for Losses

The financial offer within a settlement agreement might seem appealing at first glance, but employees may not realise it could be far less than they could receive if they pursued a tribunal claim. Without proper legal advice, employees may agree to compensation that doesn’t fully account for their financial losses, future employment prospects, or the impact on their career. In some cases, settlement offers are pitched low in the hope that employees will accept them without negotiating.

3. Confidentiality Clauses and Restrictions

Most settlement agreements include confidentiality clauses that restrict what an employee can say about their experience with the company. These clauses are often strict, limiting not only what the employee can say publicly but also what they can disclose to friends, family, or future employers. Breaching these clauses could result in financial penalties, and without legal advice, an employee may inadvertently agree to terms they didn’t expect.

4. Post-Employment Restrictions

Settlement agreements can also contain post-employment restrictions, often known as restrictive covenants, which can limit an employee’s ability to work for competitors, solicit clients, or even contact former colleagues. These restrictions can have a major impact on an employee’s career, particularly in specialised fields or industries. Employees without legal guidance may unknowingly accept these terms, only to realise later that they can’t pursue a particular role or client base without facing legal action.

5. Impact on Benefits and Pensions

Settlement agreements can have implications for pension entitlements, bonuses, and other benefits that employees may not consider. In some cases, an employer may attempt to exclude certain benefits or delay payments, leaving the employee worse off than they anticipated. A legal advisor can help identify if the terms related to these benefits are fair and ensure that employees aren’t left with unmet expectations.

Why Legal Advice is Essential

In the UK, it’s a legal requirement for employees to receive independent legal advice before signing a settlement agreement. This requirement is in place to protect employees and ensure they understand the rights they’re waiving. However, the quality of legal advice is crucial – employees should seek an employment law specialist who can offer tailored advice on the agreement’s terms, the sufficiency of the compensation offered, and the potential impact on their future career and finances.

Here’s why proper legal advice is essential:

• Understanding Your Rights: A solicitor can clearly explain which rights you’re giving up, so you don’t waive any important claims unknowingly.
• Evaluating Fairness of the Offer: A solicitor can assess whether the financial terms are fair and advise on potential negotiation strategies if the compensation is insufficient.
• Exploring Alternative Options: In some cases, a tribunal claim or alternative resolution may be in the employee’s best interest. A solicitor can help evaluate all available options, rather than rushing into a potentially inadequate settlement.
• Protecting Future Opportunities: Legal advice can clarify any restrictions and help modify terms that might otherwise limit your career or financial wellbeing.
• Avoiding Unintended Consequences: An experienced employment lawyer can ensure that pension entitlements, benefits, and other long-term considerations are covered in the agreement.

Final Thoughts

While settlement agreements can offer a straightforward way for employers and employees to part ways, they carry serious risks for employees who sign without understanding the terms. Many employees sign under pressure, fearing the consequences of refusing the offer. However, the potential impact on career, finances, and legal rights is too significant to ignore.

If you’ve been presented with a settlement agreement by your employer, don’t feel rushed. Taking the time to seek specialist legal advice can make all the difference between a fair resolution and one that leaves you at a disadvantage. As experienced employment solicitors, we’re here to help you understand, negotiate, and ensure that any agreement you sign truly serves your best interests.

Need Advice on a Settlement Agreement?

If you’re facing a settlement agreement and want to ensure your rights are protected, reach out to our team today for expert, compassionate advice. Remember, it’s your future – make sure you’re making informed decisions. 

For more information on any of the above issues, or to make an appointment call Chris Macwilliam at Clough & Willis on 0161 764 5266.