Why Would An Employer Offer A Settlement Agreement?

What are settlement agreements?

Settlement agreements are legally binding contracts between employers and employees that are designed to resolve certain issues or disagreements between the parties — often resulting in a lump sum payment for the worker. They may also include provisions such as an agreed reference or confidentiality clauses. 

A settlement agreement involves the employee waiving their contractual and statutory rights, and, in the case of a dispute, agreeing not to bring any claims against the business. Before being finalised, the worker must seek advice from a specialist employment solicitor to determine whether the proposed deal is fair. 

5 reasons for offering a settlement agreement

Employers will often offer a settlement agreement as a way to bring an employment relationship to its end, without the risk of a claim being levelled against them. They can also be used to resolve a particular bone of contention between both parties, with the worker then remaining in their post once the contract has been signed.

The main motivations for offering a settlement agreement are:  

1. Dispute resolution

Disagreements between employers and employees can arise for many reasons. Perhaps the worker feels discriminated against or there is a dispute over holiday pay. A settlement agreement can be proposed as an alternative to raising a grievance or making an employment tribunal claim. 

If an employee does have a claim, it’s a good idea for them to seek independent legal advice regarding the strength of their claim, and how much they could stand to be awarded if successful. This information could prove useful when determining whether they think the settlement agreement is fair or not. 

2. Disciplinary matters

Employers may use a settlement agreement as a way to avoid potentially lengthy processes such as disciplinaries and performance management. It is essentially an acknowledgement that the current situation isn’t working out very well, and an opportunity to conclude matters amicably. 

3. Relationship breakdown

Another reason why employers may offer a settlement agreement is in situations where there has been a breakdown in the relationship between the business and the employee, or between coworkers. Much like with disciplinary matters, the use of a settlement agreement is a way to avoid time-consuming disputes or quickly resolve an unpleasant situation.  

4. Redundancy alternative

If a company is considering making redundancies, a settlement agreement could be used as an alternative to following the standard redundancy procedure — especially if only a handful of positions are at risk. Instead of selecting from a pool of employees, businesses can negotiate with their workers to voluntarily leave their roles.

To compensate for this, employees who agree to a settlement agreement are given an enhanced severance package that is worth more than both the statutory minimum and whatever is detailed in their employment contract. This approach could be attractive for workers who believe redundancy dismissal would be a foregone conclusion, as it means they wouldn’t have to face the drawn-out redundancy process and could leave with more money. 

It’s important to note that employees are not obligated to accept a settlement agreement as an alternative to standard redundancy. If not enough workers agree to leave voluntarily, the regular process should then be followed. 

5. Playing it safe

Some companies may decide to use settlement agreements whenever an employee loses their job — even if there is no allegation of wrongdoing on the employer’s part, performance issue, or grievance. Instead, they just want the peace of mind that there will be no chance of a comeback from the redundancy and the ability to move on.

This is because employment tribunal claims, even spurious ones that have no chance of success, can cost employers thousands of pounds and a great deal of time to defend. Using settlement agreements avoids the possibility of this happening. 

When can a settlement agreement not be used?

Although offering a settlement agreement can be useful in a number of situations, there are certain circumstances in which they are not suitable. These include claims regarding personal injury and pension disputes, plus disagreements surrounding certain statutory rights.

For example, an employer cannot use a settlement agreement in cases involving maternity, paternity, adoption, or shared parental pay. They can also not be called upon to resolve claims that the business failed to follow the correct procedure when making redundancies — such as offering inadequate consultations.   

In mergers and acquisitions, settlement agreements can’t be provided when resolving claims involving the Transfer of Undertakings Protection of Employment (TUPE) regulations. Meanwhile, whistleblowing claims can also not be dealt with using confidentiality clauses in settlement agreements. 

Can an employee request a settlement agreement?

Although settlement agreements are usually offered by employers, it is possible for employees to request one as well. This is particularly an option in cases where the worker feels they’re being treated unfairly or managed out of their job. 

While an employee would be able to file an employment tribunal case in situations like this, opting for a settlement agreement instead could be seen as a mutually beneficial way of bringing the dispute to an end. It would also avoid having to go through a long and expensive process.

Whether you’re an employer offering a settlement agreement or an employee who has received one, specialist legal advice is essential. For employees in particular, it’s critical to consult with an independent solicitor before agreeing to the terms, as this is required by law to validate the agreement.

Our employment team is here to support both employers and employees with a proactive, results-driven approach. We take the time to understand the specific circumstances surrounding your issue and tailor a solution that meets your goals.

For employees, we’ll carefully review the settlement agreement to ensure you’re securing the best possible outcome. Employers, on the other hand, can trust that their contracts are appropriate and fully aligned with their needs. And if a settlement agreement isn’t the best course of action, we’re also here to protect your interests at an employment tribunal.

For prompt, practical support, contact us today.