A settlement agreement is a legal document which is offered to an employee by their employer as a way of paying them to leave the business. It is offered for a number of different reasons, or combination of those reasons:
- The employer has not followed a proper legal process for termination of employment
- The employee has resigned and the employer thinks there is a risk of an employment tribunal claim
- The employer wants to give the employee more money than they are entitled to or wants to make some of the money being given tax free
As a business, there is no obligation on you to provide a settlement agreement and as an employee there is no obligation to accept a settlement agreement, but it may be in both parties interests to tie up all loose ends of the employment relationship in a robust and legal way.
The settlement agreement is often offered to the employee in a without prejudice / protected conversation. The employee must agree to have this conversation and understand that anything said in the meeting can’t be relied on at a later date.
In cases of performance or capability issues, a settlement agreement is used as the ‘carrot’ against the ‘stick’ of a formal disciplinary process i.e. we will offer you £xxx to go, but if you don’t sign the agreement then we will commence proceedings against you. The self aware employees will generally accept this offer as it means they leave with an agreed reference and without a disciplinary record. The less aware employees may try to fight for their job, will turn down the opportunity to leave and will go through the disciplinary process. In some cases, the employer will use the disciplinary process as a way of keeping the money being offered in the settlement agreement as low as possible.
What is not covered in a settlement agreement?
Settlement Agreements (or compromise agreements as they were known) have come under a lot of scrutiny recently. It is possible that they have been classified as confidential or that they are used to ‘gag’ employees. The law around settlement agreements is changing so that employees cannot be prevented from speaking out about sexual harassment. It will no longer be possible for employers who have been accused of sexual harassment or abuse or who could be accused of sexual misconduct to protect themselves by offering large payments in exchange for a signed settlement agreement.
Do I have to use a solicitor for a settlement agreement?
An employee must take legal advice on their settlement agreement and the employer must pay for the advice. The solicitor must have valid insurance in place to allow them to advise on and sign off settlement agreements. Interestingly, the employer does not need to take legal advice on the agreement, but it should be drawn up by someone who knows what they are doing as it is a legally binding document. The employer, or their representative will usually negotiate with the employee’s solicitor to agree the details of the agreement. No payment to the solicitor is due until the document is agreed and signed. If for any reason the agreement is not signed, the employee is liable for the costs of their solicitor.
What is the employee signing away when accepting a settlement agreement?
When signing a settlement agreement, the employee must first accept that they have a potential claim against the business and that they are agreeing not to pursue that claim. Examples of claims include:
- breach of contract
- claims in relation to pay
They also usually agree to non-disclosure, non-disparagement and post-employment obligations.
Why use a settlement agreement?
The biggest argument for using a settlement agreement is certainty. No business owner likes risk in their business and a signed settlement agreement can mean peace of mind. That peace of mind often comes at a price, sometimes larger, sometimes smaller, but knowing how much something is going to cost you, means you remain in control. As a business owner you are not waiting for 3 months to see whether the employee brings an employment tribunal claim and then dealing with all the stress and time and cost involved in defending a claim, even if you have done nothing wrong.