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A guide for employers: when to use a settlement agreement?

If you are dealing with a workplace dispute or wanting to terminate a contract of employment, you may be thinking about using a settlement agreement to protect your business from potential harm and future claims.

Our employment law solicitors have outlined when it is best to use the documentation and the benefits of doing so. We have also pinpointed the common pitfalls that you should look to avoid, and how our legal team can help by preparing a settlement agreement and assisting during the negotiation process.

When is a settlement agreement commonly used?

Employers are using settlement agreements in an increasing number of situations. The documentation is commonly used in situations where there is a potential risk of a claim, including the following:

  • Redundancies
  • Expiration of fixed-term contracts
  • Resignations
  • End of employment relationships
  • Poor performance or a difficult to resolve grievance

A settlement agreement can be beneficial for both the employer and employee, allowing both parties to make a clean and amicable break from the employment relationship.

Employers can avoid the stress and cost of litigation, as the purpose of these agreements is to prevent the employee from bringing legal action against their employer. Terms can be also included that make sure the agreement remains confidential to avoid sending a message to other employers that ‘pay-outs’ will be made.

Meanwhile, employees often receive a tax efficient severance payment, along with a job reference, out-placement counselling and confirmation that they will not be ‘bad mouthed’ by the employer.

Common pitfalls

There are certain risks involved in offering a settlement agreement which employers should be aware of. Most employers would want the discussions and negotiations regarding the proposed settlement agreement to be protected from future disclosure and to remain confidential; especially in the event that the negotiations are unsuccessful. It is also important to ensure that an employee cannot use your proposed termination as evidence in a future claim. This can be a tricky area, and we recommend that you enlist the support of expert employment law solicitors, who can help you avoid the following situations:

‘Out of the blue’ settlement agreements: If you have not previously raised any concerns about an employee, or there is no existing dispute, the premature offering of a settlement agreement could sever all trust and confidence should they choose to refuse the offer. As a result, all related conversations and documents would not be legally protected, and could be referred to as part of a grievance procedure or used as evidence to support a claim in an employment tribunal.

Offering settlement agreements in an inappropriate situation or manner: Conversations and documents related to a settlement agreement only attract statutory protection in situations where that may give rise to an unfair dismissal claim. You therefore need to take extra care in cases where other claims might arise.

Also, any discrimination, undue pressure or inappropriate behaviour from the employer could result in conversations and related documentation not attraction any protection and becoming part of an employment tribunal claim.

Davis Blank Furniss has a team of specialist employment law solicitors who will be able to provide you with all the legal advice and guidance you require when drawing up, offering and negotiating a settlement agreement or another termination package. With our support, you can ensure that the process remains fair and legally compliant, to minimise exposure to any adverse consequences. Our team will also work hard to secure an outcome that is in your best interests.

Contact us for expert legal advice

If you would like any more information, visit our settlement agreement section to find out more about how we help employers. You can also contact us on 0800 0284 396 for an initial consultation with a member of our team.

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