EMPLOYER’S GUIDE | What is a settlement agreement?

A settlement agreement is a legally binding document between an employer and employee which settles any claims that arise from the employment relationship or the termination of employment.

In the agreement, an employee waives their rights to bring legal claims against their employer in return for a discretionary severance payment. If an agreement on the final terms and conditions cannot be reached, the negotiation discussions may be inadmissible as evidence to support claims before an Employment tribunal or court.

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Here are seven things you need to know about settlement agreements:

1 – When can it be used?

It may be appropriate to use a settlement agreement to end an employment relationship which, for whatever reason, is no longer working or settle workplace disputes or grievances. It may also be suitable when you wish to avoid the uncertainty of going to an Employment Tribunal or do not have the time or resource of going through a long formal disciplinary, grievance, capability or redundancy procedure.

2 – Is it voluntary?

You can’t force an employee to enter into a settlement agreement or agree to the terms and conditions you wish to enforce in the agreement.

3 – Is it legally binding?

There are a number of requirements which must be fulfilled in order for the settlement agreement to be legally binding. If it does not comply with what is required, it will be invalid and unenforceable.

4 – What claims can be waived?

Most legal claims regarding statutory and contractual rights can be waived as part of the agreed terms in a settlement agreement, including unfair dismissal, discrimination, unlawful deduction of payments and entitlement to statutory redundancy pay.

However, not all claims can be settled this way, such as claims for accrued pension entitlement, claims of personal injury which have not arisen at the date of this agreement and claims due to a breach of the settlement agreement itself.

5 – How much should the payment be?

There is no set amount laid down in the law.

The following factors may assist when considering how much to offer the employee:

  • 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.

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.

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 amount they receive will depend on their age and their length of service.

6 – Are the conversations admissible in legal proceedings?

As discussed above, if the parties do not reach an agreement, there are some circumstances where the 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.

Without such confidentiality in place, you are leaving yourself very vulnerable to future litigation.

7 – Do I need to provide a reference?

As part of the negotiations, the employee will be keen to be provided with a reference. If you agree to this, the reference should be attached to the end of the settlement agreement.

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