What is a settlement agreement?

Here we explain what a settlement agreement is, and why and when would you use one…

A settlement agreement is a legally enforceable agreement between an employer and an existing or former employee, where the employee agrees to waive their right to bring legal claims against the employer in the employment tribunal or civil court.

Protected conversations

Depending on the particular circumstances, an employer can have an open and frank conversation with the employee, informing them that they want them to leave in exchange for a payment. This is called a 'protected conversation'. This was brought into law to prevent an employee from later relying on what was said during the conversation as evidence in support of an employment tribunal claim against the employer, particularly in constructive dismissal cases. Done properly, the employer has the safety and freedom to effectively say it as it is. The employee then knows where they stand and that it would be better to leave.

Usually the employer will offer to pay the employee a sum of money, in addition to any statutory payments, in exchange for them giving up their legal rights. Sometimes the offer of an agreed reference is included, and sometimes (albeit more rarely) this may be enough in itself.

There is no set formula for how much should offered, instead there are a number of factors that should be weighed. These normally include background circumstances such as the reasons for the dismissal arising, the length of service and history of the employee, motivations, and perhaps most importantly the respective strengths (or at least the perceived strengths) of each party's negotiating position.

It is not enough for the employee to 'promise' to not bring any claims in exchange for a payment. Even if a written agreement is entered into entirely voluntarily, unless the agreement is properly drafted and executed, the agreement is simply legally unenforceable. Even an employee with the best of intentions can soon change their mind when the money has been spent and someone has had a word in their ear.

Settlement agreements are used as a way to 'settle' any existing claims if the employee has not yet been to ACAS or brought a claim in the employment tribunal. An employee is legally required to take advice from a solicitor on the terms of the agreement. The employer is expected to pay at least £250+vat towards the employee's legal fees.

Perhaps the most commercially effective way to use a settlement agreement is when the employment relationship has broken down and the exit of the employee is in the best interests of the company.

Example scenario of how a settlement agreement is the best option…

Fred is a sales executive who, despite the employer's attempts to engage him, is no longer motivated to properly fulfill his role at the company. He has five years service and his performance is mainly poor. It is clear he isn't happy and is just picking up his salary.

One option could be to go down the formal performance improvement procedure. Depending on the circumstances, and what policy and procedure you have in place, there could be up to at least 11 formal meetings with him with different members of management over a few months before he could be safely dismissed.

In addition to this, there are additional costs – the effect on staff morale, management time spent preparing for, considering and documenting the meetings and outcomes, the continued monitoring of Fred, the salary he is being paid and the loss of sales opportunity and revenue during the process.

If dismissed, and Fred feels aggrieved, he could still bring an unfair dismissal (and possible discrimination) claim against the company. This itself can lead to time and legal costs being incurred with the possibility of compensation being paid.

Overall, it could be commercially more prudent to consider a mutual termination under the terms of a settlement agreement.

Need some advice on settlement agreements? Contact the Averist team and we'll arrange a conversation.

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