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Employers: Settlement Agreements

Employers are now increasingly using Settlement Agreements as a way to end an employee’s employment, particularly in redundancy situations. 


What is a Settlement Agreement?

A Settlement Agreement is a legal document between you and your employee to any settle claims arising out of their employment or its termination. The agreement sets out the terms on which your employee’s employment will terminate or the dispute between you and your employee will be resolved. Whilst Settlement Agreements are most commonly used when an employer wants to end an employee’s employment, they can also be used in circumstances where there is a workplace dispute which does not result in the end of the employment relationship, such as issues regarding bonuses or holiday pay.


The effect of a Settlement Agreement

When a relationship between an employee and employer breaks down irretrievably, a settlement agreement can be an effective solution to resolve the situation and prevent them from bringing a claim against you in court or an employment tribunal.
A payment to the employee is often included in the agreement to compensate the employee for giving up their legal rights, and sometimes also a reference. We can ensure that the payment is fair and that it is not inflated by the employee’s solicitor.
Various restrictions can be added to a Settlement Agreement to govern what an employee can and cannot do after their employment has ended. These include keeping the agreement and the circumstances leading up to it confidential, not making derogatory comments about you or your other employees, not disclosing any trade secrets that the employee may have had access to and returning any property that belongs to you.


Why should I offer a Settlement Agreement?

Once the Settlement Agreement is signed you have certainty that the employee will not be able to bring claims against you in a court or an employment tribunal. This is invaluable in allowing businesses to plan for the future without having to take into account any potential payouts that may result from claims by ex-employees.

There is also the benefit of knowing that your ex-employee is restricted from damaging your hard earned reputation by making derogatory comments about your business or any of your other employees, or by discussing the circumstances surrounding the termination of their employment. 

Finally, the process is much quicker and cheaper than defending a claim brought by an employee. A Settlement Agreement is often a tempting solution for an employee who is considering bringing a claim against you as they will avoid court or tribunal fees, legal costs and the uncertainty of litigation. In these circumstances you may be able to settle their potential claim for much less than they could be awarded if they succeeded with it in a court or an employment tribunal.


What is a protected conversation?

When the new rules relating to Settlement Agreements came into force on 29 July 2013, ‘protected conversations’ were also introduced. Protected conversations make it easier for you and your employees to have open discussions about ending an employment relationship when there are ongoing issues that you have not been able to resolve. Anything discussed in these conversations are to be kept confidential between the parties and cannot be used as evidence in an unfair dismissal claim. A protected conversation can constitute any offer made or discussions held with a view to an employee’s employment being terminated. 

It is important to note that the confidentiality of protected conversations only applies for evidence in ordinary unfair dismissal claims, and not to other potential claims, such as discrimination or whistleblowing. A protected conversation can also lose its confidential status if you do anything that amounts to ‘improper behaviour’. Examples of improper behaviour include harassment, bullying and intimidation, including through the use of offensive words or aggressive behaviour, or putting ‘undue pressure’ on an employee.


An employee has asked for a Settlement Agreement. What should I do?

In some situations, an employee may ask for a Settlement Agreement when they feel that the employment relationship has broken down and they want to move on. This may occur where an employee’s grievance has not been upheld, or you have recently disciplined an employee and they are unhappy with the sanction. You do not need to accept the offer, but you may want to consider whether the proposal would be beneficial to your business.
Should the settlement payment be paid tax free?

Compensation payments up to £30,000 can usually be paid tax free. However, there are some situations where sums of less than £30,000 may be taxable, such as if the payment includes wages, contractual pay in lieu of notice or holiday pay. We can offer you advice on how to best structure the payments in the agreement to ensure that it is the most tax efficient, and how to avoid incurring an unexpected tax liability in the future.


I have already drawn up a Settlement Agreement for an employee but they need a solicitor to sign it off

If we have not acted for you in producing the settlement agreement then we can advise your employee on the terms and sign off the advisor’s certificate.

The benefit of advising your employee to speak to us about their settlement agreement is that we offer a fast and flexible service to enable to the process to be resolved as quickly as possible. We can offer face to face appointments at short notice, or can advise your employee over the telephone if they prefer. Depending on their circumstances and priorities, we may be able to advise them on the agreement and sign off the advisor’s certificate on the same day that they instruct us.


How we can help

Blanchards Bailey LLP has a specialist employment law team that can offer straightforward expert advice on the process, reaching a mutually agreeable settlement and how best to protect yourself from any potential claims from employees. 

We are able to advise you via telephone and email, which enables you to liaise with us at your convenience wherever you are based in the UK. Alternatively, please come and see us at one of our offices if you would prefer a face to face meeting.