Whilst settlement agreements are designed to bring workplace disputes to an end, employers and employees often approach them with very different objectives and expectations. Paula Squire, partner at Clarke Willmott, examines settlement agreements from both sides of the table.
One of the advantages of obtaining advice from a team that regularly advises both employers and employees is the insight it provides into how settlement negotiations are approached on both sides. We understand what employers are seeking to achieve when putting forward a settlement proposal, but equally we understand the concerns employees commonly have around compensation, references, confidentiality provisions and future career prospects. This dual perspective enables us to identify potential issues early, anticipate negotiating positions and help clients reach commercial and pragmatic outcomes.
What is a settlement agreement?
A settlement agreement is a legally binding contract between an employer and an employee under which the employee agrees not to pursue specified legal claims against the employer, usually in return for a financial payment and other agreed terms.
Settlement agreements can be used in a wide range of situations, including redundancy exercises, workplace disputes, performance or conduct concerns, senior executive departures, long-term sickness absence cases or following grievances or discrimination complaints.
For a settlement agreement to be legally valid, the employee must receive independent legal advice on its terms and effect.
The employer’s perspective
For employers, settlement agreements are often viewed as a useful risk management tool. Employment disputes can be expensive, time-consuming and distracting for managers and HR teams. Even where an employer believes it would successfully defend a claim, the cost of legal fees, management time and potential reputational damage can be significant. A settlement agreement offers several advantages:
- Certainty – The primary benefit is certainty. Rather than facing the uncertainty of Employment Tribunal proceedings, the employer can secure a binding waiver of potential claims and bring matters to a close.
- Cost control – Although a settlement payment may be required, it can often be significantly less expensive than defending lengthy litigation.
- Confidentiality – Many agreements include confidentiality provisions regarding the terms of the agreement and, in some cases, the circumstances surrounding the employee’s departure.
- Commercial resolution – Settlement agreements allow employers and employees to agree outcomes that a Tribunal could not necessarily order, such as agreed references, announcements to colleagues or post-termination support.
For many employers, settlement agreements are therefore seen as a commercial solution rather than an admission of wrongdoing.
The employee’s perspective
Employees often approach settlement agreements very differently. For an employee, being handed a settlement agreement can be unexpected and emotionally challenging, particularly where they have invested years in an organisation or where the proposal follows a workplace dispute. Employees will often focus on a different set of priorities:
- Financial security – The level of compensation is usually the first issue employees consider. They will often want to understand how the proposed payment compares to their contractual entitlements, their prospects of remaining in employment, the value of any potential Employment Tribunal claims and how long they may take to secure alternative employment.
- Reputation and future career – Employees are frequently concerned about the impact of their departure on future job prospects. As a result, negotiated references are often among the most important provisions within a settlement agreement.
- Legal effect of the agreement – A settlement agreement can be complex with lots of legal jargon. There can be words like indemnities and warranties and an employee wants to know what they are signing up to.
- Closure – Many employees simply want to move on with certainty and avoid the stress of formal litigation. A negotiated exit can enable both parties to draw a line under a difficult situation.
- Fairness – Whilst employers may focus on risk, employees often focus on fairness. They may ask whether they have been treated appropriately, whether the financial package properly reflects the circumstances and whether their contribution to the business has been recognised.
Common areas of negotiation
Settlement agreements are rarely just about money. The most frequently negotiated terms include:
- Compensation – The financial package may include notice pay; holiday pay; ex gratia compensation, bonus or commission arrangements, share scheme implications.
- References – Agreeing the wording of a reference can often be as important as the compensation itself.
- Confidentiality clauses- Employers generally seek confidentiality around both the agreement and the circumstances leading to termination. Employees will often want to ensure these provisions are appropriately balanced.
- Restrictive covenants – Settlement discussions frequently involve consideration of post-termination restrictions and whether any existing restrictions should remain in force.
- Announcements – The parties may agree how the departure will be communicated internally and externally.
When settlement agreements work best
Settlement agreements tend to be most effective where both parties recognise the commercial realities of the situation. Employers should avoid viewing settlement agreements as a means of forcing an employee out without proper consideration of their rights. Equally, employees should understand that settlement proposals often reflect litigation risk rather than an assessment of personal worth or contribution. The most successful negotiations typically involve open and constructive dialogue, realistic expectations, a focus on future outcomes rather than past disagreements and early legal advice.
Looking ahead
Settlement agreements remain one of the most effective tools available to employers and employees for resolving workplace issues quickly, confidentially and with certainty. However, the interests of each party can be very different. If you are considering offering, or have been asked to sign, a settlement agreement, obtaining specialist legal advice at an early stage can help ensure that your interests are fully protected and that the best possible outcome is achieved. For more information, please send an enquiry or call 0345 209 1000 to speak with a member of our employment team.
