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The Employer’s Guide to Settlement Agreements


If you are a growing business then it is almost inevitable that you may have to let an employee go on negative terms. This could be in a situation where you feel as though the employee may seek an employment tribunal. This type of situation can result in a very long and expensive proceeding – both financially and in terms of damaged reputation. This is when initiating a settlement agreement can be extremely beneficial.

How Settlement Agreements Work

When a settlement agreement is signed it legally binds the employee to giving up their rights to undergo legal proceedings or claims against their employer. In return for giving up these rights the employer will generally provide them with financial compensation or other requested benefits.

In order for this agreement to be legally binding it needs to be signed by both parties, this ensures that nobody is forced into a settlement agreementand both parties receive the security they need. After a settlement agreement is signed, the employer will have to provide the agreed reference, payment and help with tax issues in return for the confidentially clause of the employee.

To be legal, a settlement agreement must:

  • Be in written form
  • Include the particular complaints the employee may have – the more details you include here the better the company is protected
  • The employee must receive legal advice from an independent adviser before signing
  • They must be voluntary – you cannot force or order an employee to sign a settlement agreement
  • They can be offered at any stage of employment

Are There Risks Involved?

Depending on the current state of the relationship between employee and employer, the level of risk is varying. In the worst case scenario, an employee could become highly disgruntled after being let go for poor work performance or misconduct issues with no formal disciplinary procedures being carried out. This situation could see any ‘informal’ or ‘off the record’ chats being used against the employer in a tribunal which could become very costly.

However, if you have followed formal procedures and taken the appropriate disciplinary action, as well as ensuring that you legally presented the settlement agreement, then the risk is less. In this case a settlement agreement will act as an extra safety net in situations where employees may turn volatile against the company after termination.

What if the Employee Refuses to Sign?

In situations where the employee refuses to sign the settlement agreement, you are not contractually obliged to meet their claims. Without the employee signing, they still maintain their rights to claim or seek an employment tribunal meaning that they could still proceed with these regardless of receiving compensation.

Can the Compensation in a Settlement Agreement be Negotiated?

Yes. If the employee feels as though the employer has offered too little to compensate them then they are legally entitled to ask for more. Similarly, if an employer believes the employee is taking advantage of the situation then they can offer less than they are asking for. There is no set sum for how much compensation the employee receives, but it should be related to the amount it would cost in a tribunal.

What Can Settlement Agreements Contain?

Depending on the situation, a settlement agreement can contain everything from preventing them from making claims or seeking an employment tribunal to restricting them from making derogatory comments or revealing to the media that they signed a settlement agreement. Despite these latter points being more unusual to see in a settlement agreement they can be included in order to match the situation at hand.

If you are contemplating using a settlement agreement then always make sure you have sound legal advice before proceeding. This can save you time and money from incorrectly pursuing an agreement that doesn’t meet the legal requirements.

About the Author – Howells Solicitors specialise in providing employment law advice and drafting settlement agreements to ensure that your business in protected against employment tribunals and claims. To find out more about how we can use settlement agreements to safeguard your business talk to us today or visit us online.  

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