Settlement Agreements: What Should I Consider As An Employer?

Whilst many employers will have come across the term Settlement Agreements (which were known as Compromise Agreements up until 29 July 2013), understanding of the topic can vary significantly from business to business.

So why as an employer, would you look to use a Settlement Agreement? The primary motivation for an employer is that the relationship between employer and employee has broken down and the employer wishes to prevent a claim being made in the Employment Tribunal/Courts against them. In exchange, the employer will agree upon a favourable severance payment for the employee.

The reasons for using a Settlement Agreement can however be more complex than this and can be subject to a number of exceptions which are important to consider.

Perhaps the key consideration you should have as an employer is whether your employee might have any claim for discrimination (due to a ‘protected characteristic’), whistleblowing or any other automatically unfair dismissal case. If your employee falls into one of these categories, any Settlement Agreement cannot prevent them from taking you either to an Employment Tribunal or to court. Bear in mind that any pre-termination discussions which you might have with your employee can also be used in an Employment Tribunal or in court if the employee has a case for discrimination, whistleblowing or any other automatically unfair dismissal case.

Generally, an employer should avoid situations where an employee might argue that signing a Settlement Agreement was their only option as dismissal was a foregone conclusion. Settlement Agreements are most effective when an employee has come to their own conclusion that a Settlement Agreement would be appropriate.

Employers should be aware that any ‘pre-termination discussions’ should be carefully handled. You may not dismiss an employee if they refuse to sign a Settlement Agreement if you have not already been through the appropriate disciplinary proceedings. Furthermore, if you are found to have victimised, bullied/harassed or even failed to provide a reasonable length of time for your employee to consider the Settlement Agreement, a Tribunal may find that you have been guilty of improper conduct, in which case, all of your pre-termination discussions can be considered by the Employment Tribunal/Court.

It is important to remember that there are a number of formalities the Settlement Agreement will need to satisfy for it to be binding. First and foremost, employers should ensure that the Settlement Agreement is in writing. The Settlement Agreement must relate to a specific claim that the employee could raise against the employer. Finally and probably most importantly, you must allow your employee to obtain independent legal advice about the Settlement Agreement before signing the same. If you fail to take the above steps, the Settlement Agreement will not be binding and your employee may still have a claim against you either in the Employment Tribunal or the court.

When considering whether a Settlement Agreement is right for your business, it is worth looking at the costs associated. The costs of drafting a Settlement Agreement (which must be done by a Solicitor) can vary depending on the complexity and length of the Settlement Agreement. In addition to this, you will be required to pay a contribution towards your employee’s legal fees which usually range from between £50 plus VAT to £500 plus VAT. Obviously the key financial consideration will be the pay-out agreed with the employee.

Despite the costs associated with a Settlement Agreement, it can be worthwhile considering to avoid protracted disciplinary proceedings and to protect yourself against a claim from your employee in the Employment Tribunal or Court.

If you have any questions about Settlement Agreements, please contact Rebecca Harris on 0161 745 9170.