What is a settlement agreement?

By Alistair May 20, 2024 10:26

Carolyne Wahlen from Golf HR explains what a ‘settlement agreement’ is and when an employer should consider using one, if it is planning on making an employee redundant.

If an employee has less than two years’ service, a settlement agreement (this has replaced a compromise agreement) would normally be used if there is a chance that the employee could claim discrimination because they possess one of the nine protected characteristics (see December 2023 issue).

Otherwise, it is far more common for settlement agreements to be used for staff with longer lengths of service.

What is a ‘settlement agreement’?

Settlement agreements replaced compromise agreements in 2017.

They were renamed to make them less ‘confrontational’, but the aim remains the same: to get the employee to agree to waive their right to sue you for a perceived (or actual) wrong in return for an amount of money.

When should you use this option?

Some of the best times to offer a settlement agreement are:

• If you want to make just one long-serving employee redundant without unsettling the rest of the department by putting them all at risk of redundancy.

• If you don’t have any hard evidence about poor performance from an employee who’s been with you for a long time, but you just want to part company.

• You are going through the formal redundancy or disciplinary process, and the employee is raising grievance after grievance.

The worst time to offer a settlement agreement is if you have no money to pay more than the notice period.

Settlement agreements can be very quick and effective, but the amounts involved are not pocket change. You’ll have to pay them more than their notice period (sometimes much more) as you’re actually paying them for giving up their right to sue the organisation.

So, to work out how much you should be paying, as a minimum, you need to pay them their notice period, PLUS what they would have got if they had been made redundant. If they were already in a restructuring process, you would also have to add on a tax free sum for giving up their right to sue you.

If you’re extremely keen for them to accept your offer and for there to be a minimum of fuss, then you should start at one year’s pay, including notice (up to £30,000 of that will be tax-free, but not the notice period.)

Why should you use this option?

The huge benefit of getting a signed settlement agreement is that you avoid any danger of an (expensive) tribunal claim against you.

One word of warning, though – for a settlement agreement to be valid, the employee must have received proper legal advice about giving up their rights. The lawyer will confirm in writing that they have given the advice, and you, the employer, pay the legal costs (£500 to £750) so that the signature on the agreement is valid and binding.

An employee MUST have proper legal advice for their signature to be binding. Ignorance is a defence for an employee but not an employer.

How do I start?

You hold a ‘without prejudice’ meeting. This is the legal employment law jargon which means that everything said in the meeting is off the record and can’t be used in a court against you. Except it is not as straightforward as that.

Ask the employee if they would like to have a without prejudice meeting to discuss their future in the company. You do not need to give them advance notice of the conversation.

Explain to them that this means that it is off the record, and they can’t use it against you. They only have to listen, they do not have to agree to anything. Make sure that they understand that and ask if they are willing to proceed. Only when they have agreed should you proceed with the meeting. Usually, they will, if only due to their curiosity.

If they don’t agree, go on with the official reason for the meeting or end the conversation. Do not threaten them or try to persuade them. Do not mention anything that could be used to imply constructive dismissal.

Although the meeting is off the record, you cannot say discriminatory things such as ‘We don’t want any pregnant women here, so here’s some money to go’. In that case, everything you say in the conversation can be used against you in a tribunal. If you say something like that, prepare to give them a blank cheque. You have been warned!

Using a settlement agreement inevitably involves solicitors, and they will try to justify their fee. They do this by sending emails backwards and forwards. Don’t worry, we usually come to an agreement if for no other reason than the employee having smelt freedom is loath to come back and take part in a formal process such as a disciplinary.

If you do not come to an agreement, and as all the discussions are off the record, you can just take up your previous actions where you left off and proceed as before.

The employee cannot use those discussions against you.

This is a respectful and clean way to part company with an employee. The official reason for them leaving is either resignation or retirement, not that they were fired. It allows them to leave with their head held high, while the club gets the outcome it needs.