What Are Settlement Agreements? 

When it is time for an employment relationship to end, UK businesses have a powerful tool at their disposal: the settlement agreement. This comprehensive legal contract facilitates a ‘clean break’ termination, protecting your business from future claims and costly disputes. However, settlement agreements have more benefits than just mitigating risks. When handled properly, they provide a commercially sensible pathway to resolve workforce issues amicably and conclusively. Therefore, the advantages are worth investing effort into getting the terms and process right. This article outlines the essentials of settlement agreements. 

What Are Settlement Agreements?

In essence, a settlement agreement is a contract in which an employee agrees to waive their rights to bring any potential claims against their former employer relating to their job or termination in exchange for a negotiated severance settlement payment. They provide a versatile mechanism for you, as an employer, to resolve many complex workplace situations. They are commonly utilised to avoid protracted claims stemming from:

• redundancy processes;
• performance management issues;
• misconduct investigations; or 
• discrimination grievances. 

Offering an agreed severance payment in exchange for waived rights to bring an employment tribunal claim, settlement agreements prevent disputes from escalating into lengthy and costly legal proceedings.

By entering into this legally binding agreement, both parties gain certainty. Your business also avoids potentially messy and expensive employment tribunal cases down the line. Meanwhile, the employee receives compensatory monies and often an agreed reference to assist their future job search. When executed properly, settlement agreements pose a pragmatic solution in difficult situations where the working relationship is no longer feasible.

Commercial Advantages for Employers  

While not appropriate for every scenario, there are significant commercial benefits of utilising settlement agreements during employee departures, including protecting your business’ reputation and mitigating risks. We outline some key advantages below. 

Reputation Protection

Comprehensive confidentiality clauses in your settlement agreements will prevent disclosure of any sensitive information or disparaging statements about the business. This protects the company’s brand reputation during the employee’s exit.

Risk Mitigation

Settlement agreements eliminate the risks, stress, and costs associated with defending any potential litigation relating to termination by waiving the employee’s ability to make tribunal claims. 

Closure and Certainty    

With compensation paid and claims waived, both parties achieve welcome closure on the employment relationship. This binding certainty allows you to move forward without ongoing disputes.

Commercial Sensibility

Making reasonable severance payments is a sensible investment in facilitating an amicable exit. It reduces disruption and prevents disgruntled former staff.  

Satisfying Legal Formalities

It is clear that settlement agreements are advantageous for mitigating risks arising from:

• internal workplace conflicts;
• performance issues; 
• restructuring your business; and 
• other issues resulting in termination being necessary. 

However, for settlement agreements to be effective, they must satisfy specific legal formalities. A settlement agreement must, in writing: 

• state the particular claims covered;  
• confirm that the employee received independent legal advice;
• state the adviser details and insurance coverage specified; 
• include terms compliant with relevant laws; 
• confirm that statutory conditions have been met. 

Best Practice Procedures  

From the initial settlement proposal through to negotiations and executing the final agreement, you should exercise due diligence, including considering:  

• Fair Negotiations: Provide the employee reasonable time to review terms, at least ten calendar days as per Acas guidelines. Do not engage in improper behaviour, such as harassment or undue pressure tactics, as these are likely to make the agreement unenforceable.
• Proper Documentation: You should document termination details, severance payment, waived claims and references. 
• Confidentiality: Confidentiality requirements are common but cannot prevent employees from making protected disclosures about wrongdoing under whistleblowing legislation. 
• Implications: You and your employee should discuss how the agreement impacts their statutory or insurance entitlements, such as contractual benefits. 

By handling settlement agreement negotiations professionally and checking all legal boxes, you can safeguard the agreement’s enforceability and benefits for your business. 

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The Employee Perspective

From an employee standpoint, settlement agreements can provide a welcome ‘soft landing’ and compensation upon termination, despite losing their job. 

However, the severance on offer should not blind employees to the long-term impacts of signing away various employment rights and claims against their former employer. Independent legal advice is absolutely crucial.

Key Takeaways

You can fully realise the commercial benefits of using settlement agreements as a constructive solution by exercising ethical business practices and following correct procedures. These agreements are not just about preventing tribunal cases. They provide a sensible framework for employers and employees to part ways conclusively but amicably, with compensation, references and protective terms as set out in the agreements. The key is upholding transparency and following proper protocols. When employers adopt this approach, settlement agreements facilitate ‘clean breaks’, preventing messy disputes from arising later and allowing all parties to move forward definitively.

If you are drafting 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. Call us today on 0808 258 4780 or visit our membership page.

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