For employers, a settlement agreement can provide a practical way of resolving an employment dispute or bringing the employment relationship to an agreed end.
However, offering a settlement agreement is not simply a case of putting a document in front of an employee and asking them to sign it. The process needs to be handled carefully, from deciding whether a settlement agreement is appropriate through to negotiating the final terms.
Stan Burgess-Brown, Solicitor in Employment & Corporate Commercial at Hutchinson Thomas Solicitors, looks at some of the key considerations for employers.
What is a settlement agreement?
A settlement agreement is a legally binding contract between an employer and an employee or worker. It can be used to settle specific employment claims or disputes and can also agree the terms on which an employment relationship will end.
In return for agreed terms, which may include a financial payment, the employee normally agrees not to pursue certain legal claims against their employer.
A settlement agreement can also cover matters such as notice, holiday pay, bonuses, references, confidentiality and restrictive covenants.
For an agreement to be legally valid, the employee must receive independent legal advice on its terms and effect.
When might an employer offer a settlement agreement?
There is no single situation in which a settlement agreement is appropriate. It might be considered where there is:
- an ongoing workplace dispute
- a grievance or potential grievance
- a performance or disciplinary issue
- a breakdown in the employment relationship
- a potential employment tribunal claim
- a proposed change to an employee’s role or circumstances.
A settlement agreement can provide an alternative to a potentially lengthy formal process, but it will not always be the right solution. Employers should consider the underlying issue and whether another approach, such as an appropriate disciplinary, grievance or performance process, may be more suitable.
How should you make the offer?
The way an employer introduces a settlement agreement is important.
The employee should understand that the proposal is voluntary and that they are entitled to obtain independent legal advice and negotiate the terms.
Employers should explain why the settlement agreement is being proposed and give the employee a reasonable opportunity to consider the offer. The employee should not be given the impression that they have no choice but to sign.
It is also important not to assume that describing a discussion as “off the record” or a “protected conversation” automatically means it will be protected from being used in future proceedings. The legal protections around pre-termination negotiations have limitations, including in cases involving improper behaviour.
What should you offer?
There is no standard settlement agreement package. The appropriate terms will depend on the circumstances.
As well as any compensation payment, an employer may need to consider:
- notice and holiday pay
- bonuses or commission
- the employee’s leaving date
- an agreed reference
- confidentiality
- announcements about the employee’s departure
- restrictive covenants
- a contribution towards legal fees.
It is important to distinguish between payments the employee is already contractually entitled to receive and any additional compensation being offered in return for settling potential claims.
Taking legal advice before making the offer can help an employer assess the potential risks and structure an appropriate proposal.
How long should an employee have to consider a settlement agreement?
An employee should be given a reasonable opportunity to consider the offer and obtain independent legal advice.
The Acas Code recommends, as a general rule, allowing at least 10 calendar days to consider formal written terms and receive independent advice. This is not an automatic statutory deadline in every case, and more complex agreements may require additional time.
Employers should avoid creating unnecessary pressure. Giving an employee a very short deadline can make the process more difficult and may undermine confidence in the proposed agreement.
Can an employee negotiate a settlement agreement?
Yes. Settlement agreements are voluntary, and an employee does not have to accept the first offer made.
There may be negotiation over compensation, notice arrangements, references, confidentiality provisions, restrictive covenants and other terms.
Employers should therefore approach the initial proposal as the beginning of a potential negotiation rather than assuming that it will simply be accepted.
An employee must also receive independent legal advice before a settlement agreement can become legally binding. Employers will often contribute towards the cost of that advice, although there is no general requirement to do so.
What if the employee refuses?
An employee is entitled to reject a settlement agreement.
If that happens, the employer should consider how best to address the underlying issue rather than treating the refusal itself as a reason for taking adverse action.
Depending on the circumstances, this might involve continuing an existing grievance, disciplinary or performance process, exploring mediation or considering another appropriate approach.
Getting the process right
A settlement agreement can be an effective way for an employer and employee to reach a mutually agreed outcome, but it should be approached as a negotiated legal process rather than simply a document for an employee to sign.
If you are considering offering an employee a settlement agreement, obtaining legal advice at an early stage can help you assess the situation, structure an appropriate offer and manage the process correctly.
Stan Burgess, Solicitor in Employment & Corporate Commercial at Hutchinson Thomas Solicitors, advises employers on settlement agreements and wider employment matters.
If you are considering offering an employee a settlement agreement and would like advice on the best approach, contact Stan Burgess at Stan.Burgess-Brown@hutchinsonthomas.com.