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Settlement agreements: A guide for employers

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What is a settlement agreement?

A legally binding confidential agreement between you and your employee.

What is the benefit of entering into a settlement agreement?

From an employer’s viewpoint, a settlement agreement gives them the comfort of knowing that the circumstances leading up to the termination of their employment and the terms being offered remain confidential.

How is a settlement agreement different from a compromise agreement?

Settlement agreements were known as compromise agreements prior to 29th July 2013.

When might an employer use a settlement agreement?

Settlement agreements are used by employers in a wide variety of different situations. For example, when faced with an employee with work performance or misconduct issues. Settlement agreements are also used when employers are faced with having to go through a full redundancy procedure before being able to terminate.

Is there any risk in offering a settlement agreement?

When the employer offers the settlement agreement prematurely in a situation which the employee would consider to be ‘out of the blue’. Settlement agreements will also only guarantee conversations are “protected” in a narrow set of circumstances.

How much should an employer offer to pay an employee under a settlement agreement?

There is no prescribed sum in terms of what an employer ought to offer to pay an employee. How much to offer will depend on the surrounding circumstances of the case leading to your wish to terminate, the terms in the employee’s contract and any potential claims that the employee may have against you.

When should the employee expect to receive the money under a settlement agreement?

Settlement agreements usually provide that any ex gratia settlement amount is to be paid between 14 to 21 days of the agreement itself being signed. However, employers may want to make certain payments through the payroll on the usual payroll date.

How much does it cost to prepare a settlement agreement?

The amount your legal advisor will charge to draft a settlement agreement will depend on the complexity of the issues surrounding the employee and the complexity of the proposed terms of settlement.

Who pays for the legal advice an employee has to take on a settlement agreement?

It is in the employer’s interests for the employee to sign the settlement agreement. For this reason, in the overwhelming majority of cases, the employer agrees to make a contribution of between £250 to £500 plus VAT towards the employee’s legal fees.
However, in certain situations employers take the view of not offering any contribution towards the employee’s legal costs.

What if an employee refuses to sign the settlement agreement?

An employee may elect not to sign a settlement agreement on the advice of their adviser, for example if the terms are too onerous. If an employee refuses to sign the settlement agreement there is a risk they may rely on it and the conversations surrounding it as evidence in bringing a grievance and resigning and claiming constructive dismissal and discrimination and any employment proceedings arising as a result.

Advantages of offering settlement agreements

As identified in the ACAS Guidance, Settlement Agreements can:

  • Provide a swift and dignified end to an employment relationship that is not working;
  • Avoid the time, cost and stress involved for both parties in a tribunal claim; and
  • Provide compensation and often a reference for employees.

Disadvantages of offering settlement agreement

In terms of the disadvantages, the following considerations need to be taken into account:

  • The cost of paying an agreed financial sum to an employee;
  • The potential risk to the ongoing employment relationship with the individual if settlement is not agreed (and potential that they may use the Settlement Agreement and any conversations or documents relating to it in resigning and making a claim in the Employment Tribunal); and
  • The potential risk to employment relations in the wider workforce if used inappropriately or as a substitute for good management practices.

Julian Cox is Partner and Head of Employment Law at Fletcher Day

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