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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 can’t be reached, the negotiation discussions may be inadmissible as evidence to support claims before an Employment Tribunal or court.
Here are seven things you need to know about settlement agreements:
1. When can settlement agreements 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 to settle workplace disputes or grievances.
Settlement agreements may also be suitable when you wish to avoid the uncertainty of going to an Employment Tribunal or don’t have the time or resource of going through a long formal disciplinary, grievance, capability or redundancy procedure.
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2. Are settlement agreements voluntary?
Yes. 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. Are settlement agreements legally binding?
There are a number of requirements which must be fulfilled in order for the settlement agreement to be legally binding. If the agreement doesn’t comply with these requirements, 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 the agreement, and claims due to a breach of the settlement agreement itself.
5. How much should an employer offer in a settlement agreement?
There is no set amount laid down in law.
When deciding how much to offer an employee in a settlement agreement, consider the following factors:
The employee’s length of service;
The reason you’re offering a settlement agreement;
How long it might take to resolve the issue without an agreement; and
The potential cost and risk of defending a claim (or multiple claims) at 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 settlement agreement conversations admissable in legal proceedings?
As mentioned above, if the parties fail to 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
- Under Section 111A of the Employment Rights Act 1996.
Without such confidentiality in place, employers leave themselves vulnerable to future litigation.
7. Do we need to provide a reference as part of a settlement agreement?
It’s likely that the employee will be keen to be provided with a reference as part of the negotiations. If you agree to this, the reference should be attached to the end of the settlement agreement.
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Facing a settlement situation?
Handling a settlement agreement without expert support can be risky – get it wrong, and you could face costly claims, unenforceable terms, or future disputes.
At WorkNest, our Employment Law experts can guide you through the process from start to finish, ensuring your agreement is legally sound, fairly negotiated, and properly drafted. Whether you need advice on what to offer or help putting it in writing, we’re here to protect your business.
For expert settlement agreement support, contact our team today on 0345 226 8393 or request your free consultation using the button below.