How and when should you use a Settlement Agreement: A free guide for employers from our Bristol Employment Solicitors

June 13, 2017

If you have a difficult situation with an employee or your business needs to save money, a settlement agreement may be a cost-effective and low-risk alternative to dismissing a member of staff. The settlement agreement terminates the individual’s contract of employment, and they compromise all claims against the business.

Settlement Agreement

However, using a settlement agreement in the wrong circumstances can be costly and time consuming and may not solve the underlying problem.  Our Bristol Employment team answer some questions frequently asked by employers thinking of offering a settlement agreement.

Don’t jump in

Before you offer a settlement agreement or have any discussion with your employee, you should consider what your other options may be and how the situation should be handled.  Even where the offer of a settlement agreement is the right option, you need to consider what level of financial compensation is right and what you will do next if the offer is refused.  In some circumstances a protected conversation may be the most appropriate route to offering a settlement agreement.

What is a ‘protected conversation’?

A protected conversation allows some offers for an offer of settlement to be made ‘off the record’. Therefore it prevents the employee from using such discussions as evidence in any later civil court or employment tribunal hearing.  

Beware - conversations will not be protected where there are potential allegations of discrimination or where their use may be an abuse of process. Every situation is different, and it’s worth taking legal advice to be sure you can have a protected conversation.

What is a Settlement Agreement?

A settlement agreement is a legal contract between you and the member of staff which sets out the terms on which their employment is ending.  This usually involves them receiving a lump sum of compensation but brings an end to any potential and on-going claims which they may have against your business.  By completing a settlement agreement the employee will not be able to make a claim to a civil court or employment tribunal for compensation in future and the agreement can also be used to protect reputation by various confidentiality clauses.

The lump sum can often be paid tax free and, in some circumstances, can help your business make a saving of national insurance contributions. Contact us to find out what the tax position might be in each case.  

When are Settlement Agreements used?

Settlement agreements are used in a variety of situations, both amicable and contentious.  Typically you may to offer one as an alternative to a redundancy situation or if there is suspected misconduct or underperformance.  They can be advantageous where you have a desire to have a member of staff to leave discretely so as not to disturb either the remaining staff or raise questions outside of your organisation.  They can also be offered to resolve an employee grievance where other methods may not be appropriate or could cause undue disturbance.

What does a Settlement Agreement cost?

The compensation to the employee will depend on the circumstances and the employee involved. An agreement with a Managing Director with long service is likely to cost substantially more than a Junior Assistant with a limited length of service.  

It is also normal for you as the employer to pay a contribution towards the employee’s legal fees. For a settlement agreement to be valid, the employee must receive independent legal advice on the terms of the agreement. Therefore it is in your interest to ensure such advice is sought and make a contribution to that advice.  

Finally you should factor in the cost of having us draft the settlement agreement. Our terms are extremely reasonable – and it’s worth getting it right.

Are there any alternatives?

Yes.  A settlement agreement may not always be the most appropriate route. You may want to consider taking disciplinary action in cases of misconduct, or performance management of an employee who is underperforming. You may wish to carry out a proper investigation of a grievance complaint raised by an employee.  You may also want to consider mediation or involving ACAS prior to a decision on terminating that person’s employment.

What should I do next?

Our team of expert employment solicitors based in Bristol and Portishead can help you understand your options and pick the one that’s right for your business.  Call us today on 0117 929 0451 or by email.

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