Settlement agreements, when used appropriately, are an essential part of most organisations' HR strategy.

Settlement agreements, when used appropriately, are an essential part of most organisations HR strategy. They offer a way for an employer and the employee to agree terms for the employee's exit. In the first instance, there will normally be a background that prompts the decision to offer the agreement. This could either be as a result of a voluntary redundancy exercise, or due to concerns about the employee, that has led to the business looking at ways to agree the employee's exit.

Either way, the employer should have a strategy in mind early on to try and achieve the desired outcome i.e. a mutually agreed exit, with the employee signing a settlement agreement and receiving a termination package that compensates them for their employment ending.

The main 'bargain' between the two sides is the waiver of the employee's ability to bring claims against the employer, in return for the settlement payment from the employer. Settlement agreements are therefore particularly useful where the employee presents a clear risk of bringing a claim. Whether or not the mooted claim would be strong, often an employee will perceive a settlement agreement as the more practical solution, and one that allows for a relatively quick resolution.

The first part of the strategy for the employer will generally be the initial conversation (or the written communication in the case of voluntary redundancy situations). With the initial conversation, the employer should prepare a script that details the key points they want to get across. This should be tailored to the employee and will normally involve making the case for why a settlement agreement is best for both sides.

The employer should explain the offer (both the financial and non-financial aspects), the process moving forwards, and address any concerns the employee will inevitably have. If there is an active dispute (such as an ongoing contentious grievance against the employee), the communications can be labelled as 'Without Prejudice'. In the absence of an ongoing dispute, the communications should be labelled as a 'protected conversation'. Failing to attach the correct label to relevant communications, could risk the discussions being openly referred to within any subsequent tribunal proceedings.

Alternatively, the employer could hold off on making an offer and put the onus on the employee to make a first offer (after first making the case for a settlement agreement is best for both sides). Where the employer is open to a negotiation, this approach can sometimes be beneficial in showing early on whether or not the employee is genuinely interested in compromising.

As with any negotiation, the employer should decide at the outset what issues it is willing to compromise on, and what are its non-negotiables and priorities. For example, with someone who retains ties in the organisation (i.e. they have a family member who remains an employee), the employer will need to ensure that the agreement sufficiently protects the expectation of utmost confidentiality. For senior employees, the focus in drafting and negotiating the agreement will generally be on any post-termination restrictions, such as protecting the employer's clients and staff from being poached.

The contents of a settlement agreement are mainly at the discretion of the parties, except for those clauses which relate to the statutory requirements. As alluded to above, in a normal case, the termination of employment will have occurred or be imminent. The agreement will usually provide for the employee to receive a termination payment in return for waiving certain claims. The extent to which there will be protracted negotiations will depend on factors such as:

  • The seniority and salary of the employee, together with the level and intricacy of the package on offer.
  • The validity and complexity of any claims.
  • Whether the employee is departing on acrimonious or more neutral terms.
  • The legal advice being received by the employee (employees need to receive legal advice on the settlement agreement, and it is standard for the employer to pay for this advice to an agreed level).

When negotiating an agreement, it is also worth understanding the alternative position, if negotiations break down. Ultimately then, if negotiations reach an impasse, the employer can then demonstrate it is prepared for the alternative approach.

Preparation is key, as is being flexible on issues where there is scope for some level of compromise. Settlement agreements used to be called 'compromise agreements' for a reason!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.