Whilst settlement agreements are not always the solution for every difficult workplace situation, when used appropriately, they can be mutually beneficial to both employer and employee. However, there are a number of points to be aware of and to carefully think through before entering into discussions with an employee.
In our blog this week, will provide an overview of what settlement agreements are, and how you might use them in a legally compliant way within your organisation.
What is a settlement agreement and why would you use one?
Settlement agreements are legally binding, written agreements made between an employee and an employer, entered into as a way to settle a dispute, disagreement or area of concern. They are typically used for situations such as performance or conduct concerns, or in redundancy.
Settlement agreements can be used to bring employment to an end or can be agreed after employment has ended.
In terms of why employers might opt to use one, settlement agreements can be useful to control costs (for example, legal and award costs if a case is taken to tribunal), to manage time and organisational reputation, and to provide assurance that future claims will not be brought to tribunal. Settlement agreements will clearly set out the terms by which both parties are bound, including a list of the claims that cannot be brought by the employee.
In return for signing an agreement preventing an employee from raising future claims they may have considered, an employee is usually offered some form of financial compensation.
By signing a settlement agreement, an employee will also have the benefit of being able to exit an organisation quickly and with dignity, avoiding the stress of lengthy formal action, and often with an agreed reference and agreed organisational communication.
When is it not appropriate to use a settlement agreement?
In order to begin a discussion with an employee about reaching a settlement agreement, you will need to ensure that you do this in a way that protects your organisation. If you get this part wrong, you risk the content of your discussions and negotiations and the offers of compensation you have made being used as evidence against you in an employment tribunal at a later date.
There are two possible ways to help protect the discussions from being used as evidence later:
- by holding without prejudice conversations; or
- by holding protected conversations.
However, these conversations must be used in the right circumstances and conducted in the right way.
Entering into discussions with an employee
Employers can open discussions about offering settlement agreements either verbally or in writing, although a verbal discussion would be recommended as a first step to avoid the offer coming as a surprise, and to help reduce the chance of any misunderstanding.
The following steps are recommended steps when entering into settlement agreement discussions:
- Clearly set out the reasons for the discussion and for making the offer in a meeting, or meetings with the employee.
- Give the employee the opportunity to ask questions and seek clarity around the situation. Allow them to propose changes to the offer or the written agreement in subsequent meetings or correspondence. Ensure to include a reminder that the conversation is still either without prejudice or protected, and that any terms are subject to contract.
- Hold meetings at a time and in a place that is mutually convenient.
- As settlements must be entered into on a voluntary basis, explain to the employee that the discussions you are having are not expected to be admissible in any later legal proceedings. You may choose to give them a copy of the ACAS Code of Practice.
- Explain to the employee that the discussions will have no impact on any subsequent action that may be taken against them should you not be able to reach a mutually agreeable outcome.
- Explain to the employee that the discussions are entirely voluntary and that they are not obliged to participate in or continue with any discussion and they are free to reject the offer at any time.
- Before you continue, check the employee’s understanding of what they have been told and explain further if there is any uncertainty.
- Whilst it is not a legal requirement to allow the employee to be accompanied, if they have a disability, allowing them to be accompanied may be a reasonable adjustment.
- Make it clear to all parties, including any companion, that the discussions and correspondence are confidential, although, of course, they will need to discuss the details with their legal advisor and their family who are potentially affected by the discussions.
Time to consider the settlement agreement
A minimum of 10 calendar days for an employee to consider and seek advice on the terms and effect of the settlement offer, unless agreed otherwise by both parties. In practice, it often takes longer for an employee to properly consider the information, take independent legal advice and agree final terms.
Failure to allow an employee enough time to consider an offer could be viewed as you exerting undue pressure on the employee to accept and sign, resulting in the discussions becoming admissible in tribunal at a later date. However, it’s recommended that employers propose an end date during discussions, subject to seeking advice and agreeing terms, to avoid any confusion or unnecessary delay.
How to ensure settlement agreements are legally enforceable
For settlement agreements to be legally enforceable, the criteria below should be met:
- It must be in writing
- It must signed by the employee
- The employee must have received independent legal advice on the terms and effect of them signing the agreement
- The legal advisor must be identified in the agreement
- The legal advisor must be insured for claims raised by the employee for loss arising from the advice
- The agreement must relate to a particular complaint or proceedings
- The agreement must state that the requirements relating to the settlement agreement have been agreed
Can an employee reject a settlement agreement?
Yes, an employee can reject a settlement agreement at any point until it is signed by both parties. Additionally, if you are unable to agree terms, you are also able to withdraw the offer. However, careful thought should be given about what the implications of withdrawing an offer might be, and what action you would need to take next to address the original concern.
If a proposal is rejected, you will need to decide what action you want to take next. This will depend on the original reason for entering into the discussions. If, for example, there was a concern about performance or conduct, formal action/management can start or continue. However, for subsequent action to be fair, the fact that a settlement was rejected should be disregarded and have no bearing on the action being taken or the outcome of the action. Additionally, care should be taken to keep the settlement discussions and correspondence separate and not rely on them or refer to them as part of the formal process.
Employers may, of course, choose to take no action. However, this is not recommended as a way to maintain good employment relationships. Alternatives to formal action, such as mediation, may be appropriate depending on the circumstances.
What happens if the employee accepts the agreement but breaches the terms?
In this case, as the agreement is legally binding, you would be able to make a claim against the employee for breach of contract and damages in the County or High Court.
The same remedy would also be available to an employee if you were to breach the terms of the agreement. It is therefore advisable to ensure that all payments are made within the agreed timescales, including paying the legal advisor. It is also recommended to ensure that as few people as possible know about the agreement (for example, to avoid breaching any confidentiality clauses) and that there is a process in place to provide the agreed employment reference in any subsequent requests. Remember, organisations may continue to receive reference requests for a number of years after settlement agreements have been signed.
For any queries you may have around implementing a Settlement Agreement please contact Carrie for advice and guidance!
