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What are Settlement Agreements
and When Should You Use Them?

There are times when an employee/employer relationship just can’t move forward. It’s not a position than anyone wants to find themselves in but it does happen and the business needs to understand what the options are in this scenario.

A settlement agreement is something that can be considered and in this blog post we’ll look at some of the scenarios when such an agreement may be worth considering.

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What is a Settlement Agreement?

A settlement agreement is a legally binding document that allows the employer to end employment by making an employee a payment above that to which they are contractually entitled. In return for that payment, the employee agrees not to take any further action in relation to their employment. In short, when the employee walks away the employer knows that they won’t be facing an employment tribunal claim.

Prior to settlement agreements there were compromise agreement. The challenge with compromise agreements were that they were never recognised as being legally enforceable so there was always a risk that the employee would sign, take the additional payment and then bring a claim anyway. Settlement agreements address this as they are legally recognised and do achieve the desired outcome of preventing an employee bringing a claim.

However, this is only the case if you follow the correct procedure when issuing, negotiating and agreeing the settlement agreement.

When Should You Consider the Option of a Settlement Agreement?

Settlement agreements are useful when:

  • Dealing with a senior employee – taking a senior employee through a disciplinary or redundancy process can be very difficult and result in a lot of bad feeling. It’s usually cleaner and more amicable for both parties to agree to enter into a settlement agreement.
  • Dealing with on-going low-level poor employee performance or poor fit – there are times when you have an employee who really doesn’t do anything that’s so bad as to warrant disciplinary action but they just take up a disproportionate amount of management time, deliver just about adequate results and can be disruptive. Here, paying to make the problem go away can make financial sense and a settlement agreement can be a good option.
  • You’ve got it wrong – no company is perfect and there are times when you find that you’ve done something wrong. It’s rarely intentional but these things happen. When you’ve got it wrong you can either wait to see if the employee brings a claim or you can try to reach a settlement agreement with the employee in recognition of your error.
  • When you want to offer enhanced redundancy pay – if you want to offer an individual an enhanced redundancy payment then using a settlement agreement can be a good option.  By using a settlement agreement you don’t create a custom and practice in relation to offering an enhanced redundancy payment so you retain flexibility to revert to statutory redundancy only at a later date if that’s all your business can afford to do.

There are lots of other scenarios in which settlement agreements are useful but it’s important that you don’t start to see them as an easy way out.  Not all employees are interested in entering into the agreement.  You can’t always reach agreement on how much you’re willing to pay and how much the employee is willing to accept. There are strict legal requirements from the agreement and you need to follow the correct process before you even have the conversation.

Important to Remember when using Settlement Agreements

A settlement agreement has a number of requirements that need to be met for it to be binding and the process for commencing the discussion about it also has certain considerations that need to be made.

If you do not have HR expertise in-house, please consult with an external professional to guide you through the process to ensure that you can achieve your desired outcome.  This definitely isn’t an area of employment law to try to navigate on your own.

We at Lighter HR would of course also be happy to help you with any settlement agreement situations, so when you are at the point of wanting to enter into such discussions with an employee, give us a quick call on 0203 319 1649 and we will gladly ensure that you go through as smooth of a process as possible.

If you’d like help with settlement agreements, employee performance or any other HR matter, contact us on 0203 319 1649 or fill in the form below.

Contact Us

If you’d like help with settlement agreements, employee performance or any other HR matter, contact us on 0203 319 1649 or fill in the form below.

Contact Us

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