Read more articles in: Amanda Hyam, Blog, News

When is it the right time to offer a settlement agreement?

Employment relationships do not always run smoothly. In some cases, they may break down to such an extent that it may be necessary for the working relationship to be ended.

One way for employers to facilitate the end of the relationship is through the use of settlement agreements.

However, it is important to know when the right time is to offer a settlement agreement.

Head of Dispute Resolution and Employment, Amanda Hyam, explains what employers need to know about settlement agreements and when it is the right time to offer one.

What are settlement agreements?

A settlement agreement is a legally binding contract that sets out the financial terms on which an employer and employee will go their separate ways.

Settlement agreements are entered into voluntarily and agreed through negotiation.

Usually, you will give a severance payment to your employee in return for their agreement not to bring certain legal claims.

What does a settlement agreement include?

Every settlement agreement is unique because the circumstances of each case will be different.

However, there are some elements that are common to most agreements.

Typically, they will contain details of:

The amount of money you will pay the employee (which may include payments for redundancy, outstanding wages, bonuses, pay in lieu of notice, accrued holiday pay and an “ex gratia” or compensation payment).
Any restrictions on their future employment.
Confidential business matters, such as trade secrets.
A confidentiality clause to either bar the employee from telling anyone they have signed a settlement agreement, or to bar them from discussing the contents of the agreement.
The reference that you will provide your employee.
Whether there will be an announcement made to your other staff members and clients.
A mutual agreement that you and your employee will not make derogatory comments about each other.
Who is liable for any tax or National Insurance (NI) due.
Your contribution to the employee’s legal fees – while you are under no obligation to contribute, it is usually expected that you will make a contribution of at least £350 to £1,000 (inclusive or exclusive of VAT). This contribution usually covers advice in relation to the terms of the agreement and the signing of the agreement.

You cannot ask your employee to waive a possible future claim for a personal injury that neither of you are aware of – for example, for a condition such as asbestosis that can take many years to develop.

You are also not allowed to contract your employee out of any accrued pension rights.

When is it the right time to offer a settlement agreement?

There are several occasions when it may be appropriate to offer a settlement agreement.

For example, if there is not enough time to go through a full performance management or disciplinary process with your employee, a settlement agreement can be a quicker, more effective way to resolve the issue.

Additionally, if the breakdown in the working relationship is particularly acrimonious, offering a settlement agreement prevents your employee from making a later claim to the Employment Tribunal.

Not only does this save on legal costs, but it also helps to protect your company’s reputation and brand.

The “clean break” that a settlement agreement offers can be highly valuable in difficult situations.

Pre-termination negotiations

The Government has introduced a mechanism whereby employers can initiate “pre-termination negotiations” to discuss an amicable parting of the ways before a formal dispute arises.

There are strict rules about conducting these pre-termination negotiations.

The discussions cannot be used in any subsequent unfair dismissal claim at an Employment Tribunal.

However, this rule does not apply in discrimination cases or where there is any improper behaviour involved in the discussions.

Such improper behaviour is likely to include:

Harassment through offensive language or aggressive behaviour.
Physical assault.
Discrimination.
Undue pressure on one of the parties – for example, saying that you will dismiss your employee if they reject the settlement agreement, or your employee threatening to discredit your reputation unless you agree to a deal.

For example, you can only stop an employee from taking their case to an Employment Tribunal in the event of an unfair dismissal claim, not in other types of claims, such as discrimination.

While pre-termination negotiations are going on, the employee will continue to enjoy full protection of their employment rights, since they can choose to reject the offer of a settlement agreement and proceed to a tribunal.

Pursuing a settlement agreement

If you are considering offering a settlement agreement to an employee, it is vital that you seek independent legal advice.

Remember, your employee is not obliged to sign any agreement you offer. If they refuse, you may choose to continue or terminate their employment depending on the circumstances.

If the employee decides to pursue an Employment Tribunal claim, they will usually have three months, minus one day, from the date of termination to lodge the claim.

At Mander Hadley, our friendly and knowledgeable team of employment law experts can guide you through the process and ensure that the settlement agreement is fair.

For expert advice and guidance tailored to your situation, contact us today.

Amanda Hyam

Head of Dispute Resolution and 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.