What should employers know about Settlement Agreements?

In our recent guide we looked at how Settlement Agreements can be used to avoid costly employment tribunal claims and to prevent time consuming and prolonged management of underperforming staff. Below we discuss some of the key facts surrounding Settlement Agreements that employers should be aware of.

What is a Settlement Agreement?

A Settlement Agreement is a legally binding contract which can be used to bring to an end an employment relationship on agreed terms. They are less commonly used when a dispute is settled and an employee returns to work for the employer, Settlement Agreements were formally known as Compromise Agreements.

What are the benefits of a Settlement Agreement?

A Settlement Agreement can be an alternative to recourse to the employment tribunals when a dispute arises and a claim is made against an employer, for example, in the case of unfair dismissal or discrimination. A settlement involves an employee accepting what is generally called a termination payment in return for agreeing not to pursue legal claims against the employer.

This means that businesses are able to carry on as usual and avoid incurring the time and cost involved in defending an employment tribunal claim. It also allows employees to leave on agreed, amicable terms as they are normally compensated for wages and accrued but untaken holiday, but also an additional termination payment which may include a redundancy payment.

What terms are usually included?

Every Settlement Agreement will contain a set of terms which are specific to the situation, but some of the more common ones include the following:

• Payment of a termination payment
• Payment in lieu of notice
• Payment of any outstanding salary and holiday pay
• A contribution towards the employees legal fees
• A written reference or agreement to provide a positive or factual reference in future
• Restrictive covenants to reinforce existing clauses in the employee’s contract which seek to protect the employer’s interests
• Confidentiality provisions to ensure the terms of the Settlement Agreement remain private
• A non-derogatory clause to prevent negative comments by the employee about the employer
• The return of any property owned by the employer in the possession of the employee

How much does it cost?

Every Settlement Agreement is different and the complexity of issues surrounding the situation will dictate the time and cost involved in preparing a suitable agreement.

The employee is required to seek legal advice and in most cases the employer will contribute wholly or partly for this as it encourages the employee to agree to the terms.

If you are in a potentially acrimonious situation with an employee, for example they are under-performing of behaving improperly, or you anticipate that an employee may make a claim against you, then you should consider providing them with a Settlement Agreement. For more information on Settlement Agreements please see our full guide here, or alternatively call us on 020 7611 4848 to arrange a complimentary telephone consultation.