Employment law: settlement agreements: What are they? When to use them?

Employment settlement agreements are often used by employers to resolve issues or disputes with employees in a mutually agreeable manner between both parties, writes Alex Jones, Managing Director of 365 Employment Law solicitors.

Whilst settlement agreements are not always the solution for every difficult workplace situation, when used appropriately, they can be mutually beneficial to both employer and employee. However, there are a number of points to be aware of and to think through before entering into discussions.

In this article, we discuss what settlement agreements are, who can enter into such an agreement and when it is appropriate to do so.

What is a settlement agreement and why would you use one?

Settlement agreements are legally binding, written agreements made between an employee and an employer. They are entered into to settle a dispute, disagreement or area of concern and can be used to bring employment to an end or agreed after employment has ended. Less usually, they can also be used without bringing employment to an end.

In terms of why employers might opt to use one, settlement agreements can be useful to control costs (legal and award costs, if a case goes to tribunal), to manage time and organisational reputation, and to provide assurance that future claims will not be brought to tribunal. 

In return for signing an agreement, and preventing an employee from raising future claims, the employee is usually offered some form of financial compensation.

By signing a settlement agreement, an employee will also have the benefit of being able to exit an organisation quickly and with dignity, avoiding the worry of lengthy formal action, and often with an agreed reference and agreed organisational communication.

Who can enter into a settlement agreement?

Employment settlement agreements are mainly entered into between employers and employees (or ex-employees). In some cases, they can also be used between employers and prospective employees, e.g. job applicants who have a case for discrimination relating to how their application or interview was handled.

When is it appropriate to use a settlement agreement?

Where possible, a settlement agreement should be entered into where legal action has not yet been taken. Settlement agreements are commonly used where the relationship between employee and employer has broken down. They can be used to achieve a “clean break” between employer and employee, leading to termination of employment. Alternatively, they can be used to bring an end to a workplace issue or dispute while allowing employment to continue.

When is it not appropriate to use a settlement agreement?

Settlement agreements should not be used in place of good management practices. Using settlement agreements in this way can contribute to, and further, a workplace culture of poor behaviour. There may be damage caused to employment relations if it is believed that poor performance or conduct is managed and ‘rewarded’ with financial settlement, rather than through good management.

It is important to note that a settlement agreement cannot be considered for certain types of claims, including those under TUPE, the Agency Workers Regulations 2010, and the Trade Union and Labour Relations (Consolidation) Act 1992. It is also not possible to contract out of the right to pay/receive statutory entitlements, such as statutory maternity pay or statutory sick pay.

Confidentiality

Settlement agreements often include confidentiality clauses, protecting both the employer’s business interests and the employee’s professional reputation. This feature is generally not available in Employment Tribunal proceedings, which are public and could potentially harm both parties’ reputations.

How to ensure settlement agreements are legally enforceable

For a settlement agreement to be legally enforceable:

• It must be in writing

• It must be signed by the employee

• The employee must have received independent legal advice on the terms and effect of signing the agreement

• The legal advisor must be identified in the agreement

• The legal advisor must be insured for claims raised by the employee for loss arising from the advice

• The agreement must relate to a particular complaint or proceedings

• The agreement must state that the requirements relating to the settlement agreement have been agreed

Deciding the right level of payment

Deciding how much compensation to offer the employee can be difficult for employers. This will be subjective to each organisation but should take into consideration the following when deciding the sum offered:

• the employee’s length of service

• the reason for entering into the settlement agreement

• the potential costs involved if a settlement was not entered into, for example the cost of resources required to resolve the issue and cost to defend a claim at employment tribunal

• the impact on the organisation’s reputation and staff morale if the concern/issue continued.

Can an employee reject a settlement agreement?

Yes, an employee can reject a settlement agreement at any point until it is signed by both parties. Additionally , if you are unable to agree terms, the offer can be withdrawn. However, careful thought should be given by employers about the implications of withdrawing an offer, and what action would be needed to address the original concern.

Employment settlement agreements can be extremely beneficial where there is an ongoing dispute, workplace problem, or potential claim. They bring the matter to a conclusion in a mutually agreeable way. If you are considering entering into an employment settlement agreement, either as an employee (current, previous, or prospective) or employer, it is important to weigh up all of the options available before proceeding.

Employers should always take advice at the earliest opportunity.

365 Employment Law Solicitors

Tel: 01903 863284
ajones@365employmentlaw.co.uk
www.365employmentlaw.co.uk