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Settlement agreements explained

Ian Lewis
legal challenges

Terminating someone’s employment has to be one of a manager’s most unpleasant tasks. However, it’s important to put emotions aside and approach the process professionally to ensure that it is carried out correctly to protect everyone involved. Specialist employment solicitor Ian Lewis of law firm Bray & Bray explains why putting a settlement agreement in place can save all concerned time, stress and money.

One way that employers can ensure that the process is fair and legal is by offering a settlement agreement when staff are released. A settlement agreement is a binding legal agreement between an employer and an employee under which the latter relinquishes their legal right to pursue any claims against a former employer. The agreement will usually involve an incentive for the employee in the form of payment and/or certain benefits and/or a reference. This also protects the employer by closing any possible legal loopholes through which they could be sued at a later date.

Who initiates the process?
Settlement agreements are more likely to be activated by an employer, but employees can also request a settlement agreement if they are aware that termination of their employment may be imminent, or if they wish to resign but have an unresolved issue that could result in legal action.  The reasons that employees launch a claim against an employer do vary, but cases often cite issues such as a failure to follow the proper dismissal procedure, unfair dismissal, discrimination or redundancy. An employer cannot force staff to sign an agreement; they are entirely voluntary. The agreement includes terms and conditions that are mutually agreed, often through a process of negotiation, both verbal and written. However, if agreement is not reached, these negotiations are not admissible as evidence at an employment tribunal or in other court proceedings. The final settlement agreement must be recorded in writing, and if proper procedure is followed, it is legally binding.

What’s the best way to set up an agreement?
There is a cost involved, but it’s always advisable to consult a solicitor. Settlement agreements can prevent a lot of expense and upset in the long term, and as legal documents they can be complex. They need to be carefully drafted to address any potentially contentious areas. Furthermore, the strategy around offer and negotiation requires detailed knowledge of what employment claims may be worth. It’s also vital to get the timing of an agreement right and follow proper procedure in the correct order. Finally, no settlement agreement is legally binding unless an employer or employee has taken legal advice before signing.

Terms and conditions
Although it’s crucial to get the procedure right, many terms within a settlement agreement are standard, although the terms of settlement, i.e. the provision of a settlement sum or benefits, or a combination of both and a reference, will be personal to the individual. The employer may also wish to include additional safeguards around confidentiality, secrecy, instalment payments, and/or restrictive covenants or continuation of existing covenants.

An employer can offer a settlement agreement in a range of different circumstances and at any point during the termination process. This could be halfway through a disciplinary or a grievance process, or when the employment is about to be (or has already been) terminated. Settlement agreements have some incentive for the employee – often financial. It is also a requirement that the employee take independent legal advice (usually from a solicitor), on the terms and effect of the agreement with the employer paying a reasonable contribution towards the employee’s legal costs incurred.

It may seem like settlement agreements almost exclusively benefit the employee. However, they are equally important for employers as they ensure that, subject to the employer complying with the terms of the agreement, the employee cannot subsequently bring legal proceedings against the employer. In fact, if they tried to do so, the employee would almost certainly incur financial costs. This means that a small investment in this legal document ensures peace of mind, a smoother, fairer termination process and guarantees the avoidance of an expensive and unpleasant tribunal or court action. Ultimately, it’s for the employer to decide if it’s worth it to them and their company.

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