If the relationship between an employee and an employer breaks down, a dispute may arise; this dispute may give rise to employment-related claims and this, in turn, may cause the employer and the employee to have settlement discussions with a view to agreeing a settlement agreement.
What is a settlement agreement?
A settlement agreement is a contract between an employer and an employee whereby the employer agrees to provide the employee with agreed benefits as a ‘quid pro quo’ for the employee agreeing to settle their employment-related claims. In order for statutory claims to be settled (such as, for example, any claim for unfair dismissal, automatic unfair dismissal, discrimination, and harassment, among others).
Why do employers use settlement agreements?
Employers offer settlement agreements to their employees for a number of reasons, including (but not limited to):
- They are a convenient way of neatly wrapping up an employee’s employment;
- Having written terms of termination can be helpful to clearly set out the employer and employee’s obligations towards each other;
- They can help employers manage reputational risk;
- They are useful to settle existing or potential employment disputes, avoiding the need for the employer and/or the employee to expend resources on bringing or defending claims;
- The terms of settlement are usually ‘without prejudice’ (or inadmissible in court), unless either party is seeking to enforce the terms of the contract.
Settlement agreements are attractive to employees as they can receive up to £30,000 tax-free if the sum is paid as compensation for the termination of the employee’s employment. Confidentiality of terms can also be an incentive to an employee, as well as the ability to cleanly terminate their employment and move on from what can often be a stressful situation.
There can therefore be mutual advantages to both employers and employees from using settlement agreements when settling disputes, whether on termination of an employee’s employment or otherwise.
The advantages and disadvantages of using settlement agreements
Advantages
The advantages of using settlement agreements are as follows:
-Both parties avoid the time incurred, stress caused by, and cost incurred in bringing and defending an Employment Tribunal claim;
- It is a very tax-efficient way of arranging for sums to be paid to an employee upon termination of employment;
- The process of drafting, agreeing, and completing a settlement agreement is often speedy and simple;
- The employee should receive independent legal advice on the settlement agreement, so both parties will normally have access to legal advice (allowing them to make informed decisions);
- Confidentiality for both the employer and the employee regarding the circumstances giving rise to the settlement agreement, the terms of the agreement, and even the existence of the agreement;
- The employer can settle almost all claims that could be brought against it, so the employer can effectively limit its liability
Disadvantages
- The confidentiality clauses in settlement agreements (also known as ‘NDAs’) have come under fire in recent years, with allegations that they allow employers to intimidate employees into not bringing criminal misconduct to the attention of the police, or regulatory breaches to the relevant regulator; and
- There is often a power imbalance when a settlement agreement is negotiated – employers quite often have access to large financial resources, internal HR support, specialist legal advice, and have the power to hire & fire employees. This can sometimes lead to sub-optimal outcomes for employees
How to have effective settlement discussions with an employee
Employers can have effective settlement discussions with their employees by following the following guidance:
- Make sure that any communications that you engage in with the employee regarding a settlement offer and its terms are detailed as, as relevant, without prejudice, subject to contract, and a protected conversation – this will give the communications as much chance as possible of being inadmissible in a court or tribunal;
- Have full and frank discussions with the employee at an early stage as to why the employee is being offered the settlement agreement, and set out in detail what is being offered – this will lead to clarity for both parties and significantly reduce the chances that there is a dispute between the parties over what terms had been agreed;
- Make sure that the settlement agreement terms are drafted well and incorporate all of the agreed terms – this will help to reduce the amount of negotiation/amendment, and therefore reduce the time and cost spent on the agreement;
- Have a good idea when entering into the settlement discussions as to what the maximum you would be prepared to pay in settlement would be – this will allow you to set your boundaries regarding settlement and avoid confusion and delay;
- Take legal advice on your situation at an early stage – a good employment lawyer will be able to quickly analyse your situation, advise you on how to proceed, and help you to guide it to a conclusion. There will almost always be a cost for this, but this cost is normally outweighed by the cost savings that good advice entails
Conclusion
If employers want to have effective settlement discussions with their employees they should take legal advice from a settlement agreement solicitor at an early stage to maximise the outcome of, and minimize the pitfalls in, negotiating and finalizing a settlement. Be clear in why an employee is being offered a settlement agreement and what the financial (and non-financial) heads of terms being offered are; what deadlines are involved; make sure communications regarding settlement are being put on a without prejudice (and protected conversation) basis; and treat the employee courteously and politely.
