How Do Settlement Agreements Work in England and Wales?

As an employer, you may end up in a situation where an employee raises a dispute with you. Unfortunately, such situations can be serious. In some cases, your employee may suggest they want to take the dispute to an employment tribunal. However, this will almost certainly damage your reputation. To avoid this, a settlement may be the best course of action in order to resolve the dispute amicably. This process will enable you to negotiate a settlement agreement with your employee. 

Ordinarily, you as an employer will be the one to suggest a settlement. Therefore, you must be fully aware of what settlement agreements entail. In many cases, it is the best option. This is especially the case if going to an employment tribunal will likely result in a large compensation payment as well as threatening your business’ reputation. 

This article will explain how settlement agreements work by detailing what they are, how to create one, and the rules surrounding them.

What is a Settlement Agreement?

A settlement agreement is a legal contract between you and your employee or former employee. It can arise where an employee has a complaint at work, and you wish to settle the dispute directly. Employers usually use them to end the employment relationship amicably. 

A settlement agreement could contain a promise:

• of money from the employer to the employee; or
• to treat the employee fairly in future.

What Does an Employer Have to Do Before Creating a Settlement Agreement?

If you are creating a settlement agreement with your employee, you should first consider the pros and cons of pursuing this option and whether you may need to pay for your employee’s legal advice. 

1. Pros and Cons

Whilst a settlement agreement can be drawn up quickly to avoid an employment tribunal, it can involve a large amount of money for the employer to pay the employee. Where an employer takes this route and fails, they will have to consider the difficulties that will come with continuing with the employment relationship. 

2. Paying for Legal Advice

You may need to pay for your employee’s legal advice when offering a settlement. If an employee does not obtain legal advice before signing a settlement agreement, they will retain the option of taking you as the employer to an employment tribunal.

Creating the Settlement Agreement

There are three key steps you will need to take to create a settlement agreement. 

1. Negotiate

To create a settlement agreement with your employee, negotiate what they would like included within it. This could take place face-to-face or through written format. Negotiations may involve exploring alternatives and looking to compromise so that both parties have their interests met.

You should note that after these discussions, if the employee does not agree to a settlement agreement and instead takes the employment tribunal route, neither party can usually refer to the discussion in the tribunal.

2. Allow Your Employee to Consider Your Offer

An employee or former employee does not have to agree to a settlement agreement, as these are voluntary. This means any terms and conditions contained in them must be mutually agreed upon between the parties.

3. Draft the Settlement Agreement

If, having considered your offer, your employee would like to go ahead with it, you will need to draft the settlement agreement. However, a lawyer offering independent legal advice must carry this out, or the settlement agreement will not be valid.  

There are some requirements the settlement agreement must meet to ensure that it is a valid one. For example, a settlement agreement must:

• be drafted in a written format;
• refer to the correct dispute;
• contain details of the lawyer who drafted it;
• state concisely what actions have been agreed; and
• state that it conforms to the rules about settlement agreements.

As an employer, you should also note that you are responsible towards your employee or former employee when you draft the settlement agreement. Therefore, you must make sure that all information is accurate and correct to avoid potential liability for providing misleading information.

What Happens if One Party Breaks the Settlement Agreement?

If you break a settlement agreement, this is a breach of contract. Therefore, your employee has the right to make a claim for breach of contract in court. If the agreement was created whilst an employment tribunal was taking place, it may put the tribunal on hold. If this is the case, and you have not stuck to the agreement, the employee can require the tribunal to continue.

Key Takeaways

Understanding settlement agreements in terms of what they are and the rules surrounding them is essential for employers. This enables an employer to create a settlement agreement if they face an employee who has a problem or complaint at work and is threatening them with a potential employment tribunal. 

If you need help setting up a settlement agreement, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions