EMPLOYER’S GUIDE | Negotiating a settlement agreement

There may be a time when you wish to provide a quick end to a dispute or want a clean break when terminating an employee’s employment and you will need to negotiate your way to a settlement agreement.

Once signed, a settlement agreement can provide you with the peace of mind of knowing that the employee will not be able to lodge claims against you in an Employment Tribunal or court.

However, they involve careful negotiation. It may involve a process of offers and counter-offers to try and reach an agreement as the employee may not be happy with the package on offer or feel it is not the best way to deal with the issue.

[infobox]Exclusive Bonus: Get our free Employer’s Definitive Guide to Settlement Agreements to find out more about what to include in your settlement agreement.Download Now[/infobox]

What does the negotiation process involve?

Negotiations can be face to face or through written communication. Although employees do not have a statutory right to be accompanied by a colleague or a trade union representative to meetings, you may wish to allow this to help aid discussions.

You will need to draft a proposed agreement, which needs to be considered by the employee. You must provide them a reasonable amount of time to think about the terms they are being offered. In order for the agreement to be legally binding, the employee must receive independent legal advice from a legal adviser such as a qualified solicitor or barrister or a certified officer, official, employee or member of an independent trade union or a certified and authorised advice centre worker. This adviser must not be connected or employed by the employer.

How can you protect your business?

The contents of settlement agreements will differ according to the circumstances, but in order to ensure that your business’ interests are protected, it is important to make it clear that the parties will agree to keep the terms of the agreement and the circumstances surrounding the termination confidential. The employee should agree not to use confidential information or trade secrets after the employment relationship has ended (or at least remind them of the ongoing duties of confidentiality already contained in their Contract of Employment).

There should be an agreement to a ‘non derogatory’ clause, which stops the employee from making negative or derogatory comments about the employer, including on social media websites.

It is also useful to make sure that agreement reaffirms any post-termination restrictive covenants in the employee’s Contract of Employment. If there aren’t any in the employee’s contract, it may be possible to set out new restrictions in the agreement.

[infobox]Exclusive Bonus: Get our free Employer’s Definitive Guide to Settlement Agreements to find out more about what to include in your settlement agreement.Download Now[/infobox]

How much money should you offer employees?

The law does not lay down a fixed amount which should be paid, so it will depend on the individual circumstances of the case. From your perspective, it is key to ensure costs do not spiral out of control, while offering an appealing overall package to the employee. Striking the balance is not always easy, but here are some factors you should consider when deciding how much to offer:

  • how long the employee has worked for you
  • the circumstances around why you are offering the settlement agreement
  • how long it will take to settle the dispute if an agreement is not reached
  • the potential liability and cost of having to defend a claim or multiple claims in an Employment Tribunal

Remember, if an employee has worked for you for two years or more and you are making them redundant, they will be entitled to a statutory redundancy payment. The payment depends on their age and their length of service.

Some employers may provide their employees with a contractual right to enhanced redundancy payments. The way this is calculated should be clearly outlined in your Employee Handbook.

You will also need to cover benefits accrued up to the termination date, any untaken holiday allowance, notice or payment in lieu of notice, outstanding holiday pay, any bonuses, etc.

Most employers will also pay or contribute towards reasonable legal fees (for example, up to a specified maximum) incurred by the employee when obtaining legal advice on the terms of the agreement. Typically, the employer will make a contribution of between £250 and £350 plus VAT.

Seek advice from our Employment Law Advisers to find how much is reasonable to offer in your specific circumstances.

What happens if an agreement is reached?

If an agreement is reached, both parties need to sign it and retain a copy for their records.

What occurs if no agreement is reached?

You cannot force an employee to agree to your terms and conditions. If after a series of offers and counteroffers you simply cannot agree, you may up having to continue the employment relationship.

Or, depending on the reasoning for trying to obtain a settlement agreement, you can fall back on formal procedures: disciplinary, grievance, redundancy or capability.

Alternatively, you could explore if there are any other solutions, such as mediation, to resolve the dispute.

Even if there is no agreement, there are some circumstances where negotiation discussions cannot be used as evidence in legal proceedings by either party to support their cases.

There are two ways to maintain the confidentiality of the conversations:

  • Under the ‘without prejudice’ principle; and/or
  • Section 111A of the Employment Rights Act 1996.

[infobox]Exclusive Bonus:Get our free Employer’s Definitive Guide on Settlement Agreements to guide you through this tricky area of law.Download Now[/infobox]

Need some guidance?

Our Employment Law Advisers can support you step by step through the process and draft the settlement agreement for you to ensure it meets legal requirements and is in line with what your business wants to achieve. Contact us to find out what services we can offer you.

Director of Legal Services

James Tamm

Whether you’re facing an immediate challenge or just want the reassurance of an expert second opinion, we’re here to offer clear, commercial advice so that you can focus on what you do best.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

Call us on 0345 226 8393.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

Call us on 0345 226 8393.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

Call us on 0345 226 8393.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

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We combine the service quality of a law firm with the certainty of fixed-fee services to provide expert, solutions-focused Employment LawHR and Health & Safety support tailored to employers.

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