Settlement Agreement Advice for Employers
A settlement agreement is a legally binding document that an employee and an employer sign to terminate an employment contract. It’s sometimes called a ‘severance agreement’, ‘an exit package’, or ‘compromise agreement’.
By signing a settlement agreement, the employer usually agrees to pay their employee a sum of money. In return, the employee agrees not to take legal action against the employer.
These types of agreements are often used when making employees redundant to avoid the redundancy process, and when:
- The employer considers the employee to be underperforming;
- An employee has expressed significant dissatisfaction with their role or the company; or
- There is simply a clash in personalities.
Settlement agreements provide a confidential and legal method for the employee and employer to part ways on agreed terms. Employers also use them to close claims of unfair dismissal or discrimination in the workplace.
If you are an employee looking for advice on a settlement agreement, please visit this page.
What are the benefits of settlement agreements for employers?
A properly drafted settlement agreement is legally binding. The idea is that you won’t have to worry about your former employee making further demands.
What’s more, as an employer, it’s usually more cost-effective to reach an agreement with a current or former employee than to let the dispute eat up your valuable time or reach an employment tribunal.
An employment solicitor can advise you on how much a tribunal might award a disgruntled employee, including identifying potential heads of claims (both contractual and compensatory). This then enables you to make a judgement on what kind of lump sum to offer for a settlement agreement instead.
How do settlement agreements work?
A specialist employment lawyer will usually draft a settlement agreement. They offer a way to resolve employment disputes or ‘head off’ potential employment disputes and can be offered to an employee who has raised an issue, such as serious grievances and accusations of unfair dismissal. It can also be used where there is the potential for a claim, e.g. when making someone redundant.
For a settlement agreement to be legally binding, it must:
- Be in writing
- Relate to a specific issue or issues, i.e. it cannot be a blanket agreement for the employee not to bring an employment claim for any reason
- Only be signed by the employee after they have taken independent advice from a lawyer or certified, authorised Trade Union member
- Identify the employee’s adviser
- State the statutory conditions regulating the agreement
You will need to give the employee an appropriate amount of time to consider the agreement before signing. Acas recommends a minimum of 10 days for this.
Employer settlement agreement FAQs
Not necessarily. Employers don’t need legal advice for a settlement agreement; however, because it’s a legal contract, it is recommended that you seek advice from an employment law solicitor.
There are a variety of template agreements that you may find online, including via AI, that look good on the face of it, but do not have the necessary clauses to ensure it is legally binding, make it compliant, or include clauses which you actually want it to do. Read more about the risks of using AI for legal documents here.
The benefits of seeking legal advice for a settlement agreement include:
- A lawyer can help ensure the agreement accurately reflects the terms agreed between the parties
- They can help negotiate better terms, where appropriate
- Peace of mind that the agreement meets the statutory and legal requirements for validity, including compliance with up-to-date legal changes
- Customisation beyond a standalone template to protect your business as well as the employee’s best interests
- It offers the best chance of reducing the risk of future claims, including for breach of contract, pay-related claims, discrimination, unfair dismissal and/or personal injury claims
While employers have no obligation to seek legal advice for a settlement agreement, employees are required to have a lawyer review the agreement before it can become legally binding.
A settlement agreement is not the same as redundancy. Settlement agreements can be made at any time and are often used to settle a dispute or to eliminate the risk of a future dispute between the employer and employee.
When a settlement agreement is agreed, the employee can waive their right to go through the redundancy process in return for a payment or ensure that even if the redundancy process was not entirely fair and proper, there is no comeback on the employer for an unfair dismissal claim.
While settlement agreement templates may be widely available and they do tend to follow a set structure, what is included depends on the circumstances, so there is no one-size-fits-all settlement agreement.
However, as a guide, a typical settlement agreement includes:
- A financial settlement offer. This should account for the employee’s tenure, how long it may take them to find another job (and thus backfill the role), the reasons for the agreement and any possible liabilities involved if agreement isn’t reached.
- Payment breakdown. It is important to separate the contractual payments and the settlement payment, or ex gratia payment, being made.
- An agreement about how the employee will exit the business, including what handover is expected, whether they will be placed on Garden Leave, etc.
- An explanation as to how any tax will be treated (the first £30,000 of any compensation payment can be paid free of tax)
- A contribution towards the employee’s legal costs
- Confidentiality clauses, e.g., an NDA
- A reference
Settlement agreements are normally used when an employer wants to quickly and ‘cleanly’ bring an issue or matter to an end, without the risk of formal claims.
While they can be beneficial, settlement agreements should not be used to attempt to fix serious issues such as sexual discrimination or harassment claims, or to replace proper procedures.
An employer should consider offering a settlement agreement if there is:
- An ongoing issue, such as a performance concern;
- A breakdown in the working relationship;
- A potential redundancy situation; or
- A dispute that risks escalating into a formal grievance or claim
Settlement agreements are often given without prejudice and/or in line with rules on protected conversations. Read more about protected conversations here.
If you are considering offering a settlement agreement, it is worth speaking to our specialist employment solicitors to ensure it’s appropriate and to guide you on what to do next.
There is no legal minimum amount of money you should offer or include in a settlement agreement. However, a typical payment ranges from three to six months’ salary, plus notice pay. It can also include holiday pay.
Yes, you can include an NDA in a settlement agreement, and employers often do. But in some situations, a non-disclosure agreement, even within a settlement agreement, is not legally binding or enforceable. This means the employer cannot take someone to court if they break the terms of the agreement.
By law, a non-disclosure agreement cannot stop someone:
- Whistleblowing
- Reporting discrimination
- Discussing their pay with anyone at work for reasons relating to equal pay
- Reporting a crime to the police, including reporting sexual harassment to the police
- Sharing information to get advice and support if they are a victim of a crime in England or Wales
Universities and other higher education providers in England cannot use a non-disclosure agreement to stop workers disclosing:
Blog | Ban on NDAs to silence abuse
Need advice about settlement agreements? Contact our employment solicitors in Bristol
Our employment solicitors advise employers and business owners all over the UK, from our offices across Bristol and the surrounding area in Bedminster, Bishopston, Bristol city centre, Kingswood and Thornbury.
For more information on how to negotiate a successful settlement agreement, or to speak to our employment lawyers, call us on 0117 325 2929 or complete our online enquiry form.