How to write a settlement agreement

Settlement agreements are a helpful tool if you want to swiftly part with a member of staff.

The idea is that an employee is financially incentivised to leave their job: the deals are legal, amicable (as possible) and they allow everyone to quickly move on.

And while the agreements have been around for five years, (they replaced compromise agreements, in July 2013) arguably, they are more useful than ever.

Recent figures show a sharp increase in employment claims – single claims are up by 90%, according to the latest figures from the Ministry of Justice.

However, the way employers handle the process is all-important. So, here’s what you need to know.

What are settlement agreements?

A settlement agreement is a formal agreement between an employer and an employee dealing with the settlement of claims that the employee may have arising out of his/her employment or its termination. Usually an employee accepts a sum of money in return for agreeing not to bring certain legal claims against the employer.

When should you offer one?

At best, a settlement agreement offer won’t come out of the blue. When it does, an employee may feel shocked or angry, making it harder to reach an amicable deal.

Settlement agreements are often offered as an alternative to disciplinary action or redundancy – and can sometimes be used in place of gardening leave if that clause wasn’t in an employee’s contract.

It’s also worth checking the employee’s record. For example, has the individual raised any complaints that could relate to discrimination or potential whistleblowing?

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What should the terms be?

A settlement agreement is a binding legal document that usually involves an employee losing their job – and their income. So, they are going to want to be incentivised to do that.

Financially, it can be helpful to offer a tax-efficient structure of payments, for example.

Other ways to sweeten the deal include: agreeing to provide a reference, paying for career outplacement services, allowing the employee to keep company equipment (such as a laptop) and continuing employee benefits (such as healthcare policies) until the next renewal date.

Typical terms will also include those which protect the company, for example: confidentiality, non-bad-mouthing clauses and sometimes, restrictive covenants (limiting how/when they can approach clients/customers).

Who should make the offer?

Pre-termination negotiations – also known as a protected conversations – have come into force as a way of encouraging employers to have open conversations with employees about terminating their contracts.

Typically handled by an HR or senior leader, settlement talks require a grasp of employment regulations – refer to our Employment Law for HR Professionals guide to stay on safe ground.

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If either party behaves badly in the discussions, for example: an employer asking a pregnant employee to consider leaving, and the employee believes it is because she is pregnant, the discussion may not be ‘protected’ and could result in a claim.

It can be helpful to get advice from an employment solicitor so the person leading the discussions follows a fair, legal process.

What to negotiate

Settlement agreements are only legally binding if the employee has had independent legal advice and the document has been signed by a relevant legal adviser (for example a solicitor).

It’s usual for the employer to meet at least some of the costs of this. Typically, employers offer anything from £250 to £500 (and more, if the employee was a senior member of staff).

Negotiations should reflect employee entitlements, especially in redundancy cases – see our Redundancy Rules for Employers article to ensure your offer is both fair and compliant.

So, before you start, make sure you know what the employee is entitled to. Do they have any share options or healthcare policies, for example? Benefits, and length of service will help you decide what is a reasonable and fair offer.

What happens if they don’t sign?

If the employee decides not to sign the settlement agreement, then the employee is free to make any claim against the company he or she thinks they have.

However, ultimately, an employer may find another way to end their employment, at the conclusion of a redundancy, disciplinary or performance management procedure, for example, and the employee may potentially end up with nothing.