Settlement Agreements for Employers 

Ensure you meet your obligations 
Reach an agreement that works for your business 
Protect your business interests 
Advice on settlement figures 
Representation when negotiating an agreement 
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What is a Settlement Agreement? 

A settlement agreement is a special kind of contract between an employee and an employer. It’s an exception to the general rule that a person cannot give up his or her rights to make a claim in an employment tribunal or a court. 
 
An agreement is a sensible way of resolving a dispute but any attempt to do this without following the rules on settlement agreements won’t work and the arrangement will be unenforceable - a good reason why you should seek legal advice early. 
 
The purpose of a settlement agreement is to record how the terms of employment will end or a dispute will be resolved. Those terms are usually that the employer will pay a sum of money in return for the employee giving up rights to make the employment-related claims set out in the agreement. 

Settlement agreements are normally used: 

to end a disagreement between an employer and an employee at the end of employment 
to reach a negotiated compromise about how and on what basis an employee will leave 
occasionally they are used where employment continues but a dispute needs to be resolved 
 
Settlement agreements are used in many kinds of cases where employment law issues arise such as unfair dismissal or discrimination claims. They are also becoming increasingly common in cases of redundancy
 

The rules in brief are: 

Settlement agreements must be in writing and in a specified format. 
Settlement agreements must contain certain information stipulated by law. 
An employee must receive advice on the meaning and effect of the settlement agreement by someone qualified to do so, such as Spencer Shaw Solicitors. That advice must include the effect of the settlement agreement on an employee’s ability to make a claim to an employment tribunal. The cost of this advice is often covered by the employer. 

Non-disclosure agreements 

Increasingly, non-disclosure agreements (NDAs) and confidentiality clauses are being used in settlement agreements. These clauses can be helpful where you want to protect business interests or sensitive information. However, due to some misuse, such clauses are now subject to additional regulation and a high level of scrutiny. 
 
It is important that businesses ensure they are using the clauses in a fair and transparent way. To misuse non-disclosure agreements could not only risk a legal challenge but would risk reputational damage. More than ever, it is vital that companies obtain legal advice. 

Settlement Agreement FAQs for Employers 

How long should I give my employee to consider a settlement agreement? 

Parties to the agreement must be given a ‘reasonable time’ to read the agreement and receive advice. What is reasonable will depend upon the circumstances. ACAS recommends that at least 10 days to receive advice and consider the terms of the agreement, unless both agree otherwise. 

How do I negotiate a settlement agreement? 

If you aim to negotiate a settlement agreement, it is important to research beforehand. You should have a clear idea of what you hope to get from the agreement. Set yourself a range from ‘best possible outcome’ to ‘minimum acceptable’. Be realistic – an agreement is often a compromise to resolve a dispute outside of court, so it is unlikely both parties will get everything they want. You should only sign an agreement you are happy with, but you should also be willing to acknowledge when you have a good deal – you don’t want to push too far and lose the option of a beneficial agreement. 
 
Advice from a suitably qualified solicitor will give you a good idea of the compensation you could be ordered to pay if the claim is successful. Also bear in mind the cost, time and potential impact on your reputation involved in going to tribunal. A tribunal win is never guaranteed 
 
The easiest way to negotiate a settlement agreement is to employ a solicitor to act on your behalf. An experienced solicitor, such as Spencer Shaw Solicitors, will know the appropriate level to pitch offers and counter offers, how to engage with the other party’s solicitor.  
 
Having an expert act on your behalf offers peace of mind.  

How long does a settlement agreement take? 

Your employee must be given a reasonable time to read the agreement and receive advice on it. What is reasonable will depend upon the circumstances. ACAS recommends that parties should be given at least 10 days to receive advice and consider the terms of the agreement, unless both agree otherwise. 
 
If the parties are willing an agreement can be concluded quickly. 
 
If you enter into negotions, this will take a little longer. The exact time will depend upon how easily you reach an agreement, and how quickly both sides respond in general. 

When does a settlement agreement become binding? 

A settlement agreement becomes binding when it is signed by both parties. 

Does a settlement agreement need to be witnessed? 

No, a settlement agreement does not legally need to be witnessed, though you can have a witness as added verification. 

What should a settlement agreement include? 

The contents of the agreement will depend upon the parties involved, the relationship, and the issues that are being resolved. It must be specific about the particular claims that are being settled. A general catch all provision will not be sufficiently precise to be effective. 
 
The agreement should cover the responsibilities of both parties to uphold the agreement. For example, it may state that you will make a specified payment and offer a positive reference while your employee will waive any employment claims and agree to keep the matter confidential. 
 
It is helpful to include details of how the payment figure has been reached, as there may be tax implications arising because of the agreement. 
 
If the agreement is being made to end the employment relationship, it should detail how this will be done. For example, will the employee work their notice, or will the relationship end immediately? 

Can a settlement agreement be overturned or appealed? 

Settlement agreements must follow certain rules in order to be enforceable. Agreements that do not meet these requirements will not be enforceable. 
 
Aside from these rules, there is no right of appeal for an agreement. This makes it even more important that you receive legal advice when reaching an agreement. 

Can my employee take legal action after signing a settlement agreement? 

Often a settlement agreement is a way of settling a dispute without legal proceedings. Your employee will not be able to make a claim about the issue that was ‘settled’. 
 
Agreements also exclude issues that may not obviously be in dispute. Your employees right to take action is significantly limited afterward an agreement, however some rights cannot be ruled out. 
 
You may take legal action to enforce the agreement if it is breached. If you breach the agreement, your employee may take action agaisnt you. This right cannot be removed. 

What happens if my employee refuses to sign a settlement agreement? 

We can help you to negotiate the terms of your settlement to try and reach a satisfactory agreement with your employee. 

What is a reasonable amount to offer in a settlement agreement? 

This will depend upon several factors and may vary from case to case. It may also vary from person to person. When assessing a settlement agreement, you might consider: 
 
The salary or wage and any other benefits your employee is giving up. 
Notice period and untaken leave. 
How long they have worked for you. 
In agreements relating to a dispute, does the settlement resolve the issues to your satisfaction? 
The time, costs and emotional resources involved in taking the case to tribunal if you cannot reach an agreement. 
How difficult it will be to replace them. 

Do I have to pay my employees legal fees for settlement agreements? 

Employers are not legally obliged to contribute, but it is extremely rare that they do not. 
 
Most employers contribute towards the cost of advice for employees entering into a settlement agreement. The standard contribution offered by employers is usually enough to cover advice about the meaning and effect of the settlement. 
 
Employers usually do not pay for the cost of any negotiations about terms. 

Can a settlement agreement be rescinded or withdrawn? 

Once an agreement is signed, it becomes legally binding on both parties and cannot be altered without agreement on both sides, usually in writing. 
 
A settlement agreement may be withdrawn at any point before it is signed. This is usually done if the circumstances change before signature. 
 
It is unusual for an employer to make and then rescind a settlement offer without a good reason. 

Are settlement agreements confidential? 

Settlement agreements often include confidentiality clauses, also known as non-disclosure agreements (NDAs) which make the agreement, its terms and the circumstances leading up to it confidential. 
 
As an employer you may wish to include provisions to protect your confidential information. 
 
Confidentiality clauses may not be used to prevent or discourage ‘whistleblowing’ - making a protected disclosure in the public interest. Any clause that attempts to prevent whistleblowing will be unenforceable. 
 
Given controversy around such clauses, we would strongly advise you to seek legal advice before including such a clause in an agreement, to ensure that you use the clause correctly and ethically. 
 

Are there rules for settlement agreements? 

Settlement agreements must follow certain rules in order to be enforceable. Agreements that do not meet these requirements will not be enforceable. 
 
These rules include that the agreement must be in writing and that it must contain specific information. Most importantly, the employee must receive legal advice about the meaning and impact of the agreement. 

What happens if you breach a settlement agreement? 

If either party breaches the terms of a settlement agreement, the other party may make a claim for breach of contract. Usually this would involve making a claim to the County Court or High Court, though Employment Tribunals do have limited jurisdiction for some breach of contract claims. 
 
The usual remedy for breach of contract is damages, based on actual loss caused by the breach. 
 
Some agreements will include a clause to determine what happens in case of a breach. For example, it may say that if an employee breaches the agreement, they will pay back all or some of the payment, depending on the extent of the breach. This must be a genuine estimate of the loss caused by the breach and not a financial penalty to deter a breach. 

Does a settlement agreement need to include notice pay? 

If the agreement deals with termination of employment it is usual for notice to be dealt with. Depending on the circumstances, you may agree that your employee will work their notice or you may offer payment in lieu of notice (PILON). 

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