SUMMARY: Learn more about settlement agreements with the answers to some of the most frequently asked questions.
Q: When can we use a settlement agreement?
A: Settlement agreements are often used to resolve workplace disputes, and to give the employer the certainty that once the agreement is signed there will be no subsequent employment tribunal claim from a disgruntled employee. More often than not, the employment relationship will have broken down. The focus then is usually on avoiding unfair dismissal and discrimination claims. A whole raft of statutory employment rights and breach of contract claims can also be compromised.
There does not necessarily need to be a dispute as settlement agreements can be used in a variety of other circumstances where the employment will end. For example, where there are performance or ill health issues, a voluntary exit or a restructure.
Settlement agreements are not however always about the employment relationship ending, as they can be used at any time during the employment relationship to resolve workplace disputes. For example, if there has been a complaint about how holiday pay has been calculated.
We would recommend that where a settlement agreement is being contemplated, legal advice is taken before any discussions take place with the employee so that any legal risks are identified and then can be properly managed.
Q: What are the benefits of using a settlement agreement?
A: A settlement agreement allows an employer to manage legal, commercial and reputational risks all in one go in the knowledge that there will be no tribunal claim. Significant management time, stress and expense can be saved.
Terms can also be agreed on issues that a tribunal would be unable to address. For example, the offer of a positive reference; or the introduction of post termination restrictions, where the existing contract is silent on the employee’s activities once they have left.
Settlement can also keep a dispute out of the public eye and be subject to strict confidentiality provisions.
These benefits need to be balanced with the fact the employee will want something in return, no matter how at fault they may be. Money is usually the main consideration but the circumstances may dictate an entirely different exit package. There are also restrictions on an employer’s ability to compromise personal injury and accrued pension rights claims.
Q: Are there any essential requirements which need to be complied with to make the deal binding?
A: The following are essential to ensure that the employee is not able to bring an employment tribunal claim:
- The settlement agreement must:
– be in writing;
– identify the complaints to be compromised; and
– state that it satisfies certain legal requirements.
- The employee must also have received independent legal advice.
A poorly drafted agreement or one which has been incorrectly signed may leave the door open for an employee to bring a tribunal claim, even if they have already been paid a sum of money.
Q: How long should we give an employee to consider a settlement agreement?
A: An employee should generally have at least 10 days to consider the settlement agreement and obtain legal advice. A shorter period could lead to allegations of undue pressure, permitting reference to the settlement offer in a subsequent tribunal claim, if settlement is not reached.
If there is a commercial imperative requiring a shorter period, legal advice should be taken.
Q: Do we have to pay for the employee’s legal advice?
A: An employer is not obliged to pay the employee’s legal costs. To get the job done, an employer will often choose to make a contribution. A good starting point is £250 plus VAT. The following factors may demand a higher contribution: locality, seniority of the employee and the complexity of the case.
Q: Can we recycle a settlement agreement used in the past for a different employee?
A: We would caution against recycling for two reasons:
- Each employee’s circumstances are different; and these circumstances need to be taken into account in the agreement. A one size fits all approach will not provide the employer with the best possible protection; and may give no protection at all.
- Any changes to the law may require amendments being made to the agreement.
If you would like to explore whether a settlement agreement may be the best option for your business where you have a workplace problem – please contact:
+44 (0) 808 172 93 22
This update is for general guidance only and does not constitute definitive advice.