Settlement agreements were introduced in 2013 as a tool for employers to facilitate the departure of employees from their organization efficiently, while mitigating the risk of legal action from the employee. They are commonly used in situations involving redundancy or underperforming employees and involve offering the employee a financial payment in exchange for their resignation and agreement not to pursue legal claims.
For employers, settlement agreements can streamline the process of managing underperforming staff; for employees, they offer a means to secure a fair financial settlement without the need to go through the potentially lengthy and stressful process of an employment tribunal. This approach is typically faster, less costly, and less stressful for both parties involved.
To be legally binding, a settlement agreement must satisfy the following three conditions:
- It must be in writing.
- It must relate to a specific claim or claims that the employee could potentially bring against the employer.
- The employee must have received independent legal advice before signing to ensure they fully understand the agreement and its implications.
As an employer, your priorities when negotiating a settlement agreement should be:
- Securing the employee’s agreement to the settlement without unnecessary conflict.
- Avoiding overpayment beyond what is necessary.
- Ensuring that all potential types of claims the employee could bring are addressed and waived.
- Preventing the employee from taking any actions that could harm your business interests after their departure, such as soliciting clients.
As an employee, your priorities when negotiating a settlement agreement should be:
- Ensuring the financial settlement offered is fair and adequate.
- Requesting that your employer agrees to provide a positive and accurate reference.
- If a reason for termination is stated in the agreement, ensuring it won’t negatively impact the employer’s ability to provide a good reference in the future.