Top five things businesses need to know about settlement agreements

Legal | Reports

As employers, we always hope to be able to resolve disagreements with our employees through internal procedures, but sometimes this isn’t possible.

  1. What is a Settlement Agreement?

A Settlement Agreement is the official term for a document that has been known as a compromise agreement, termination agreement, mutually agreed resignation, ex-gratia payment, gagging clause, or a ‘golden goodbye’.

It is a legally binding contract between an employer and employee that agrees terms to ‘settle’ a disagreement or the end of an employer-employee relationship. It is a permanent resolution that limits an employer’s legal liability.

Usually, the employee agrees to leave their position or to adhere to the terms of a solution to a workplace dispute. They also waive their rights to any Tribunal or court proceedings – in return for some level of financial payment.

A Settlement Agreement needs to be created by an independent lawyer, and both the employer and employee should make use of legal advice when entering into the agreement.

  1. When are they used?

Typically, a Settlement Agreement is used when there is irreparable damage to the employer-employee relationship and avoiding the long process of disciplinary procedures or a claim to an Employment Tribunal.

Some examples include:

  • Post being made redundant – avoids lengthy consultation process
  • Evidence of gross misconduct or inadequate performance – alternative to being dealt with under usual disciplinary policy, and can avoid an unfair dismissal claim
  • Unfair dismissal Claim – if an employee is making a claim, a Settlement Agreement can avoid proceedings
  • Discrimination claim – an out of court settlement can satisfy both parties

The Settlement Agreement is one of only two ways an employee can legally waive their rights to a Tribunal or other legal proceedings – the other is through an Early Conciliation Agreement through ACAS – but this is very limited in terms of the actual agreement.

  1. What is the benefit?

As an employer, finding a mutually beneficial way to end an employment relationship is preferable to legal proceedings.

Settlement Agreements bring the issue to a permanent resolution, avoiding lengthy Tribunals and the bad press that a damaged relationship can bring. A ‘clean break’ is often preferable to ongoing bad feeling, and a Settlement Agreement can be a good way to agree to amicable terms.

When an employment relationship ends with a Settlement Agreement, the employee is usually bound by a confidentiality clause, which prevents them discussing any aspect of the Agreement – so the company reputation is protected.

As an employee, the obvious benefit is financial recompense. Sometimes other terms may be beneficial, such as the addition of a reference and/or avoiding a dismissal on their employment record.

  1. What is usually included?

We suggest that the Settlement Agreement is offered early on in any performance reviews if the case is relating to poor performance or an employee grievance – and both the employer and the employee can suggest it as a permanent resolution.

As a legal document, a Settlement Agreement must be entered voluntarily; neither the employer nor the employee are obliged to agree to terms. It must be presented in writing, and the employee should seek their own legal advice from a lawyer familiar with Settlement Agreements. Of course, all Settlement Agreements must be created by a lawyer, and this person needs to be named in the document.

As part of the Agreement, it is usual that the employee will agree not to bring further proceedings against the employer. The only caveat to this is that if, for example, the employee worked in a hazardous environment and later developed an illness related to that employment, they would still be able to claim if that wasn’t part of the agreement. Usually this relates to illnesses like Asbestosis from exposure to asbestos.

They will also usually sign a confidentiality clause, which prevents them from discussing the terms of the Settlement Agreement, the value of any payment and the reasons for the Agreement in the first place. Employers may wish to discuss how they will present the resolution to other staff – for example a mutually-accepted resignation.

The terms that benefit the employee are usually a financial payment of some kind – as part of the Agreement it is usual to be clear about the amount and the timeline for payment to prevent any ambiguity.

Some employers may want to offer a reference as part of the Agreement – it is not a legal requirement but makes the offer more appealing to many employees so it can be beneficial. Do remember that any reference must be honest and truthful.

As an employer, you must be aware that the employee may not agree to the terms of the first draft Agreement. Be prepared for negotiation of some or all your suggested terms.

  1. How do I get started?

The first thing you need to do is speak to an employment lawyer, one that specialises in Settlement Agreements.

When approaching a solicitor about this, you need to approach an independent company to ensure that the document is fair. ACAS have some excellent resources available for employees and employers to ensure that any disciplinary or grievance procedure is clear, and what to expect when looking at a Tribunal or any form of legal action, including Early Conciliation Agreements and Settlement Agreements.

Whatever you decide to do, working through a poor employment relationship can be tough, so getting legal advice from employment solicitors can help you make better decisions.

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