Settlement agreements are commonplace on the termination of an employee’s employment. But what are they and how can they best be negotiated for your business?
Contents:
What is a settlement agreement?
A settlement agreement is a legally binding contract that can be used on the termination of employment. These agreements are voluntary and used to clarify agreed terms. An employee will typically waive their right to make specified claims to a court or employment tribunal, in exchange for a payment made to the employee.
In order for a settlement agreement to be legally valid and binding, the agreement will need to be in writing, must relate to particular complaint(s) or proceedings; and the employee must have received advice from a relevant independent adviser on the terms of the agreement.
The advisor must be identified in the agreement and have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee for loss arising from that advice. Finally, the agreement must state that the statutory conditions regulating the settlement agreement have been satisfied.
When can you use a settlement agreement?
As settlement agreements are voluntary, they can be used at any time before or after the end of an employment relationship if both the employer and employee agree. It may be that a settlement agreement is proposed by an employer when an employee has raised a concern or brought a claim. However, an employee can equally suggest a ‘protected conversation’ is held and a settlement agreement entered into.
In some instances, a protected conversation or settlement agreement will not achieve the desired result. For example, details of confidential discussions to end employment can be disclosed in court or Tribunal proceedings where an employee subsequently brings claims relating to discrimination or automatic unfair dismissal such as for whistleblowing, union membership or asserting a statutory right. Similarly, where there has been improper behaviour by the employer, this protection does not apply, including where fraud, undue influence or some other ‘unambiguous impropriety’ has arisen such as perjury or blackmail.
Are you in a strong negotiating position?
Where a settlement agreement is offered, it does not have to be accepted at all. Or, if both parties wish to reach settlement but have not agreed on the precise terms, it is possible for a process of negotiation to ensue. Whether you are in a good bargaining position depends very much on the circumstances in which you find yourself agreeing to a settlement agreement. If this is in response to a claim or grievance, which you believe may be well founded, you are less likely to be in a good position than if you are just looking to expedite a redundancy process. The length of the employee’s service with you is also likely to determine whether you are in a strong bargaining position or not.
Settlement agreement negotiating tactics
In order to best minimise any damage, it is advisable to obtain early legal advice from a settlement agreement lawyer. The negotiation tactics best employed will depend on what the background issues are and the reasoning for the settlement agreement. An expert with experience of negotiating in a number of different scenarios is invaluable.
Our employment solicitors can guide you on the best way to present a settlement offer and the best timing for this in the circumstances, to minimise the chances of a negative reaction from your employee. You may feel that offering the minimum your business is required to offer to your employee is the correct approach. However, if you offer a little bit more as a tax-free payment, it can speed up the negotiation process. Beware though, that an employee does not gain momentum while negotiating with you and gradually edge you past what you are prepared to pay.
Common mistakes
There are a number of pitfalls employers would be wise to avoid when it comes to negotiating settlement agreements. Below are a few:
- Is a settlement agreement the best option? – before thinking of the strategies you might employ to negotiate a settlement agreement and the amount you might want to offer an employee, it would be prudent to consider whether a settlement agreement is actually the best route to take or whether another option should be considered, at least at first. Depending on the nature of the dispute or problem, resolution might be sought through a performance management, disciplinary or grievance process, and termination of employment may not be the desired result. Or, even where termination is likely, if you carry out a process you may be able to mitigate or better investigate and be less concerned about the claims being made by your employee before deciding on whether to consider a settlement agreement and a settlement figure to be offered.
- Relying on settlement discussions: it is important that you do not rely on settlement discussions going well and being successfully concluded at the expense of following fair processes and the other principles set out in the Acas Code of Practice on disciplinary and grievance procedures. If the employee is subsequently dismissed and claims unfair dismissal or resigns and claims constructive unfair dismissal, failure to follow these processes fairly could lead to successful claims being made against your business and an uplift being added to the former employee’s compensation. Always remember that the employee does not have to agree to a settlement agreement or the specific terms you offer.
- Not seeking legal advice early enough: it is advisable that even before you approach an employee with the suggestion of a settlement agreement, that you seek specialist advice from a settlement agreement lawyer. This will help you to be best prepared for the discussion and informed on what would be a good deal and how to avoid claims for constructive unfair dismissal. If it appears that an employee is being pushed out of the business and there is no alternative to a settlement agreement, this could be construed as constructive unfair dismissal. Similarly, there may be claims which are brought because of the way a settlement agreement is presented. For example, if unlawful discrimination occurs during a settlement discussion, this may form the basis of an employment tribunal claim for discrimination, which was not previously an issue.
- Not setting a deadline: particularly where you are using a settlement agreement as a means of expediting a redundancy, disciplinary or grievance procedure, where time limits are required for those processes, it is wise to make any offer of settlement time limited. This way, if the deadline is not met, you are able to commence the process you were otherwise trying to avoid, without jeopardising the fairness of those processes or not being sufficiently proactive. Setting a deadline is often an effective method of focusing both parties on reaching a speedy resolution, which capitalises on one of the main advantages of a settlement agreement.
- Pressurising the employee to accept the settlement offer: on the other hand, whilst deadlines can be helpful, these should not be too tight and put undue pressure on an employee, particularly if they are unwell. Whilst you may genuinely believe that you have made a fair and reasonable offer and you are keen to know where you stand by getting an agreement promptly agreed, it is critical that you allow the employee the time to properly consider the offer and seek independent legal advice. Attempts to pressurize an employee to accept the offer you have made can often backfire, as goodwill disappears, and the employee looks to work against and not with you. ACAS suggests that a minimum period of 10 calendar days constitutes a reasonable period of time to consider a formal, written settlement agreement, but this may vary depending on the circumstances.
- Not including a confidentiality clause: even once an agreement becomes binding, it is advisable to include a clause asserting that the existence and content of the settlement agreement should remain confidential. This type of clause would generally only allow the employee to disclose terms to a partner who must keep the terms confidential or a legal or other professional adviser or to HMRC or as required by law. This ensures that other employees and the wider public do not become aware of the settlement agreement.
- Restrictive covenants: there may be some post termination restrictions already set out in your employee’s contract of employment. The best course of action where this is the case, is to state that any restrictions in the employee’s contract of employment, which are stated to remain after the termination of their employment, will remain in place. If there are no post termination restrictions already set out in your employee’s contract of employment, you may deem that such provisions would help to protect your business and that you would like to introduce these. Seeking legal advice on how this can be done is essential here. You will also need to offer at least a small sum of money for these restrictions to be binding, as legal consideration is required.
- Not listing all relevant potential claims: there will be a section in the settlement agreement which sets out which claims are being settled under the agreement. Legal advice from an expert is strongly advised to ensure that you are listing all potential claims and do not leave out any claims which could then be raised by the employee notwithstanding a completed settlement agreement. You are not permitted to list out all potential and irrelevant claims though. These should be tailored to the situation in question which a lawyer can help you with.
What to do once you have reached an agreement in principle
If you and your employee have agreed the basic terms upon which any outstanding claims will be settled, an employment solicitor can help to draft up a settlement agreement which will reflect those agreed terms. You will need to give careful thought not only to the amount of money you will pay in settlement but also how and when any payments will be made. Further, any conditions that will be attached to the payment, such as return of company property, providing a handover and that no disciplinary matters are later discovered, amongst other things, should be carefully considered and drafted into the agreement.
As discussed above, this may lead to a straightforward signature and return of the agreement once the employee has received legal advice, or it may result in a negotiation process. You may decide to instruct a solicitor to communicate with your employee or their legal adviser, but if you choose to correspond in respect of a settlement agreement, all correspondence should be marked ‘without prejudice and subject to contract’ until the agreement is completed by all parties.
What happens if someone breaches the settlement agreement?
If you and the employee complete a settlement agreement, it becomes a binding contract and both parties must honour its terms to avoid being in breach of contract. Very few claims are carved out of a settlement agreement as the objective is to settle claims, but you are able to enforce the terms of the settlement agreement. As such if a party breaches the agreement once it has been completed, this could result in a breach of contract claim.
Summary
In conclusion, seeking legal advice from a settlement agreement lawyer at an early stage can help protect your business from future claims. An experienced solicitor can help you negotiate some of the finer legal details in a settlement agreement. An solicitor can also help you draft settlement agreements on your behalf. However, if you choose to deal with the settlement agreement negotiation directly, ensure that you label all correspondence relating to the settlement as ‘without prejudice and subject to agreement’ until the agreement completes.
