Settlement agreements


When it comes to resolving disputes in the workplace, the parties involved typically want it to be dealt with as simply and smoothly as possible. After all, taking a workplace dispute to an employment tribunal can be a highly stressful and expensive process.

Instead, proposing a settlement agreement can be an effective way for an employer to secure closure, while minimising the risk of reputation damage.

That being said, although these kinds of agreements can be a speedy way of tying up loose ends, they do involve a number of important steps that need to be followed.

But, don’t get yourself in a pickle. Keep reading, and you’ll discover all you need to know to effectively navigate settlement agreements in the workplace.

What is a settlement agreement?

Settlement agreements go by a number of names, including:

  • Golden goodbyes
  • Termination agreements
  • Gagging clauses
  • Mutually-agreed resignations
  • Ex-gratia payments

This kind of settlement is a legally binding contract agreed to and signed by both an employer and employee voluntarily. Due to it being totally binding in law, a solicitor should be involved to provide independent legal advice and certify the agreement.

Back in 29 July 2013, under the Enterprise and Regulatory Reform Act 2013 (ERRA), the name of these settlements changed from compromise agreements to settlement agreements. This was done in order to more accurately reflect the nature of the settlement. The name change was also made to encourage more dispute resolution to take place within the workplace.

When are settlement agreements used?

Settlement agreements are used in a number of different scenarios. In cases of redundancy, an employer may propose a settlement agreement in order to avoid having to go through the long and gruelling consultation process. In these cases, employees forgo their right to a fair redundancy process, but in turn, they will usually receive a more sizeable payout from their employer.

Alternatively, a settlement agreement may be used in situations where an employee has exhibited continual poor performance, or committed misconduct. Instead of adhering to the normal dismissal procedure, an employer may choose to opt for this agreement, so that the employee leaves without causing any disruption to the business.

Equally, if an employer has discriminated against an employee, or dismissed them unfairly, a settlement agreement may be proposed in order to save the company from exposure and embarrassment.

Other situations where a settlement agreement may be chosen, include cases where there has been a breach of contract, cases of unequal pay, cases of harassment and failure to pay the National Minimum Wage (NMW).

Things to consider before settling

Before making the decision to sign a settlement agreement, it’s important that employees take a number of things into consideration.

Employees should reflect on whether they understand the terms of the agreement. If they do not, it would be wise to hire a solicitor or alternatively talk to a local Citizens Advice. This will be useful in cases where employees need to help dissect any complex legal jargon.

Another important factor to consider is whether the employee is fully aware of their employment rights. For example, an employee who is offered a settlement may be unaware of what they are entitled to, if they pursue a claim against their employer.

Additionally, an employee should review what kind of benefits they will receive from agreeing to a settlement. Whether it’s a positive job reference, or a substantial payout, it’s essential that an employee knows they are receiving the best deal.

How are settlement terms reached?

In order for settlement terms to be reached, a number of steps must be followed in order for an agreement to be legally binding.

First and foremost if an employee is still under the employment of a company, the employer will usually invite the employee to a meeting, where the reasons for and conditions of the settlement will be discussed. This meeting should include information about the consequences the employee will face if they do not leave the company and their role.

Once an employee has attended a meeting to discuss the settlement, and has expressed their interest in the settlement, an employer will present them with a document. This will outline the terms of the settlement and typically offer a compensation amount or some other alternative benefit. On top of this, the employer will state that the employee must take on legal advice from an independent legal adviser, relating to the settlement offer. This legal adviser’s advice must also be covered by insurance.

As outlined by Acas, best practice surrounding this, will see an employer give an employee at least ten calendar days to process the offer. Of course, within this time period, the employee can negotiate the offer they receive with their employer.

If an employee agrees to the settlement offer, to ensure it is legally binding, it must be made in writing, and should also relate specifically to the dispute brought forward by the employer. In addition to this, it must be made by a lawyer external to the employer, and the document should identify the lawyer.

Settlement payments and standard terms

Settlement payments are calculated based on a number of different factors. Employers will take into consideration:

  • The number of years an employee has worked for the company
  • The cost of taking the case to an employment tribunal
  • The length of time it would take to resolve the dispute if the settlement is not agreed to
  • The reasons the employer has initiated the settlement agreement

That being said, whatever the amount is that both parties agree to, generally, the first £30,000 will be tax free.

In addition to a compensation payout, the employee should also receive any outstanding pay, holiday and bonuses. Usually, the employer will also pay contributions towards the employee’s legal fees.

Finally, both parties will be asked to sign a non-disclosure agreement, and a non-derogatory clause. The former ensures that both parties do not discuss the settlement agreement, while the latter ensures that neither party speaks unfavourably about each other.

Final thoughts

So, if your company wants to resolve workplace issues with an employee, without having to launch into an employment tribunal case, a settlement agreement might be for you.

However, it’s important to stick to the official guidelines to ensure that everything is legally binding and on the straight and narrow!

Adhering to best practices will also serve to foster a positive reputation for your company, and prevent any hurt feelings on part of the employee that was let go.

Article Created By Madaline Dunn

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