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Employment settlement agreements – Common pitfalls and how to avoid them

To bring an employment dispute to a mutually satisfactory end, many parties will turn to a settlement agreement.

A settlement agreement is a formal agreement between an employee and employer, typically made to stop a complaint from escalating and being taken to an employment tribunal.

This may be done in exchange for you giving up your right to take the case to tribunal – with your employer promising to resolve the issue by either paying you a sum of money or ceasing unlawful treatment, or both.

They can provide an amicable solution for both parties once the terms of the contract are agreed. However, settlement agreements can also carry a range of potential issues which all parties involved should avoid.

Amanda Hyam, Senior Associate in Mander Hadley’s Employment and Dispute Resolution team, explores the common pitfalls of settlement agreements and how to avoid them.

Navigating settlement agreements

A settlement agreement may well be the best solution for an employee looking to bring a claim to a tribunal. However, individuals should tread carefully when considering whether to accept one.

“One of the most significant pitfalls in settlement agreements is rushing into them without due consideration,” Amanda explains.

“With both parties seeking a swift resolution, employees may feel rushed or even pressured to accept an agreement without fully understanding the terms, liabilities and potential consequences before agreeing.”

This can lead to disadvantageous terms for the employee which do not fully address the significance of the situation.

Avoiding ambiguity

“Ambiguity is a death knell to any airtight contract” according to Amanda, based on her years of experience managing settlement agreements for clients.

Using vague or ambiguous language can create legal loopholes or open the door to future disputes and unintended breach of contract.

All parties should be meticulous in drafting the agreement and, if possible, discuss potential scenarios and the potential for future disagreements before signing the agreement.

For example, a settlement agreement may specify:

  • The financial settlement
  • Confidentiality and non-disclosure
  • Non-competition clauses

Although it can seem excessive for employees, it is important that settlement agreements fully and unambiguously reflect the terms agreed.

Key clauses must be defined by both parties and agreed upon, with the wording of the contract binding the parties to honour the agreement.

Anyone considering entering into a settlement agreement has to seek advice from a solicitor and have them review the precise wording of the contract before signing. An agreement will not be binding without independent legal advice.

Don’t forget the role of mediation

Less time-consuming and far more cost-effective than immediately resorting to litigation, mediation can either be used alone or prior to reaching a settlement agreement to avoid progression to a tribunal. Mediation can be an invaluable tool in settling disputes amicably.

“One potential error that I see often is employees overlooking the role of mediation in resolving an employment dispute,” says Amanda.

Understanding your responsibilities

In addition to preventing litigation between two parties, a settlement agreement also creates obligations for those involved.

There is a significant emphasis on the responsibilities of the employer, whether that be making a payment or changing their working practices.

However, it’s important to remember that the employee also has legally binding obligations after signing a settlement agreement.

Many agreements contain a confidentiality clause, requiring employees to avoid disclosing details of their claim or the settlement itself.

Failing to enforce confidentiality clauses can result in reputational damage or breaches of trust, so employers are typically quick to ensure compliance.

The employee may face significant penalties for breaching this agreement.

Approaching an employment dispute

“Settlement agreements are appealing to employers and employees for their relative ease and the ability to avoid litigation at tribunal,” says Amanda.

“However, they are not without complexity, and it can be quite easy to get tied up in knots that have serious legal ramifications for one or both parties.”

Employees involved in a dispute with their employer should seek legal advice to understand the benefits and drawbacks of a settlement agreement and review the language of specific clauses to ensure that they will not be disadvantaged by the contract.

To help you review and enter into a settlement agreement, please contact us.

Amanda Hyam

Senior Associate – Dispute Resolution / Employment

I have specialised in Dispute Resolution, Civil Litigation and Employment law for more than 15 years.  I understand how daunting the prospect of litigation can be and because of this I am always available to discuss concerns.