The benefits of settlement agreements for employers


These are extremely difficult times for businesses across the UK as well as around the globe.

The restrictions brought about by the Covid-19 pandemic have impacted on practically every sector and industry. As a result, many businesses are planning to restructure and make redundancies in order to survive and thrive.    

Whether you are a small business or a large corporation, the prospect of an unfair redundancy dismissal claim being brought against the company can be daunting.    The cost of having to defend such a claim in the present economic climate can have long term implications for the future of a business.

Entering into settlement agreements can be an effective way of protecting your business if you are considering restructuring and reducing headcount.  

What are settlement agreements?

Previously known as a compromise agreement, a settlement agreement is a legally binding document that sets out the terms upon which an employee will leave your business. 

It normally focuses on the staff member agreeing not to bring any claims against the company in exchange for a termination payment (which may consist of or include a redundancy payment).  

However, settlement agreements are often used in other situations aside from redundancy – eg an employee has been off work on long-term sick and there is no indication of when they might be able to return to work, or there may be performance issues and the company wants to avoid the time-consuming process of implementing a performance improvement plan.   In such cases a settlement agreement can be the perfect solution to both parties. 

The benefits of settlement agreements

  • The purpose of these kinds of legal agreements is to create a clean break for both the employer and the employee. 
  • It means that the business does not have to worry about the employee taking them to a tribunal for unfair dismissal, discrimination claims or other types of claim, such as breach of contract etc.
  • It can avoid the time and expense of going through a lengthy redundancy consultation and selection process, initiating a capability procedure or implementing a performance improvement plan. 

There are obvious benefits in entering into a settlement agreement – for both the employer and the employee.  A settlement agreement can be a very cost-effective way of bringing the employment relationship to an end with the minimum of risk.    Neither the employer nor the employee has to find the time or money to bring or defend an employment tribunal claim, which can be a time-consuming, costly and stressful experience.  

The agreement should contain confidentiality clauses to ensure that circumstances leading up to the termination of employment as well as the existence and terms of the settlement agreement itself are kept confidential.   

Are there any disadvantages?

Not really, no.   There is, of course, a cost to having a properly drafted settlement agreement drawn up.   However, this should be seen as an investment rather than an expense as a well drafted settlement agreement will, over time, pay for itself many over times in terms of saving the business owners the time, stress and financial costs of dealing with a disgruntled employee after the employment relationship has ended.

Generally, there will be a term in the settlement agreement that an employer will make a contribution to the employee’s legal fees for taking legal advice on the settlement agreement (obtaining legal advice is mandatory), however it should be made clear in the settlement agreement that it is a contribution only  towards an employee’s legal fees.   The amount should be set out in the agreement so that there is no misunderstanding. 

Do you need a solicitor to offer a settlement agreement?

The short answer is yes – if you want to ensure that the settlement agreement attains its objectives and is legally enforceable.  Settlement agreements, by law, must contain certain conditions if they are to be legally enforceable.  Such an agreement can avoid wasting months dealing with claims which could have been used constructively in running the business. 

A solicitor will be able to draft the settlement agreement and advise on the right process to implement it.  There are various contractual and legal requirements when terminating an employee’s contract of employment and the agreement can protect the company whilst ensuring clarity and certainty for both parties.  

It is important to explain to an employee why a settlement agreement is being offered.  However, it is absolutely essential that the correct process is followed and if in doubt a quick call to a solicitor may avoid unnecessary problems later down the line. 

An employee must consult an independent solicitor who will examine the content of the settlement agreement and advise accordingly. 

Settlement agreements are widely used in larger businesses but they are also a useful tool for small to medium-size enterprises. In an uncertain world where jobs are under threat, putting one in place with the right warranties and confidentiality clauses will ensure that the wider interests of the business, such as its reputation and customer base are properly protected.   

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