Settlement Agreements: Legal Framework and Negotiation 

Unfortunately, employer and employee relations do not always go smoothly when you run a business. Instead, you could fall into a dispute with an employee, find that they have a particular complaint with you or your employment contract relationship with them is simply not working. When employment issues arise, such as needing a clean break or employment disputes, which could lead to employment claims, such as unfair dismissal, you may consider entering into a settlement agreement. This is a type of compromise agreement rather than ending up with a legal claim such as a discrimination claim. If so, both you and your employee should take independent legal advice. This article will explain settlement agreements in terms of their legal framework and negotiation. 

What is a Settlement Agreement? 

A settlement agreement is a legally binding contract between you and an employee to agree to terminate their employment. You and your employee may voluntarily enter into a settlement agreement and usually agree on terms of a payment made to them and the rights they waive as a result. The latter usually includes the right to make particular court or tribunal claims. 

Settlement agreements will typically contain, for example, a provision concerning payment in lieu of notice so that your employee works their notice before leaving. They also include terms on holiday pay regarding any holiday they have not used. 

Why Use a Settlement Agreement?

Either you or your employee can suggest using a settlement agreement. You may sign this agreement when you mutually end your employment with each other. This may be where you agree the employment relationship is no longer compatible, or it may be to expedite a redundancy. 

Commercial Contracts Checklist

Download this free Commercial Contracts Checklist to ensure your contracts will meet your business’ needs.

Download Now

A settlement agreement may also be helpful when your employee raises an issue or dispute. For example, the employment dispute may be over the disciplinary process or a performance review. A written agreement can even be agreed upon after your employee has started a claim against you in an employment tribunal.

Legal Framework

As settlement agreements are legally binding, you should speak to a dispute solicitor if you use one. To ensure that your settlement agreement is legal and binding, it should: 

• be in writing; and
• be about a specific company or proceedings.

Also, to ensure the settlement agreement is legally binding, your employee has to take advice first from a relevant adviser about the terms of the agreement. The adviser must:

• be independent;
• named in the agreement
• specifically advise that by agreeing, they waive rights and precisely what these are;
• have relevant insurance covering any loss the employee may incur based on their advice.

It may be in your interest to pay for the legal advice your employee needs to obtain, as this ensures these aspects of the settlement agreement’s legality are covered.

The settlement agreement should also expressly confirm compliance with legal rules to ensure it is legally binding.

Negotiating a Settlement Agreement

If your employee voluntarily agrees to an agreement, you should negotiate it carefully. This allows you and your employee to get the terms that suit you both. Negotiation for you as an employer is essential if you are in a weak position. This is likely to be where the settlement agreement is to resolve a grievance. Also, the longer your employee has been with your business, the weaker your bargaining position may be.

Inviting your employee to a meeting is one way to negotiate a settlement agreement. Here, you should examine the issues and the settlement offer in detail. Sometimes, offering more than the minimum can help complete the negotiation process sooner rather than later. 

When negotiations end, you can send the employee a final written offer before drafting the negotiation agreement. 

Key Takeaways

You may have a settlement agreement with your employee when you terminate them. For example, to expedite the redundancy process. These must follow specific criteria to make them legally binding, such as being in writing and containing details relating to particular issues. There are also specific rules about your employees taking legal advice to ensure they are legally compliant. It is essential to negotiate a settlement agreement carefully, especially where you may have a weak negotiating position. A good solicitor can help you with the negotiation process. 

One way to approach negotiation is by meeting with your employee. During the negotiation process, you should allow at least ten working days for both to consider the proposed terms before finalising the written agreement. 

If you need help understanding settlement agreements in the UK, LegalVision’s experienced disputes and litigation solicitors 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. So call us today on 0808 196 8584 or visit our membership page.