What are the benefits of offering an employee a settlement agreement as a way of bringing an end to their employment contract?

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What are the benefits of offering an employee a settlement agreement as a way of bringing an end to their employment contract?

A settlement agreement (previously known as a compromise agreement) is a legally binding document where an employee agrees not to pursue a claim or claims against their employer, typically in exchange for a sum of money or other benefits.

There are several reasons why an employer might consider offering a settlement agreement to exit an employee from the business:

  • Mitigation of Risk: The main reason to offer a settlement agreement is to avoid the risk of potential tribunal claims. Employment tribunal claims can be costly, time-consuming, and unpredictable. By offering a settlement, an employer can mitigate the risk of a claim being brought against them.
  • Cost Effective: Even if an employer believes they would win in an employment tribunal, the legal costs and the time taken out from the business to deal with the claim can outweigh the costs of a settlement agreement.
  • Confidentiality: A settlement agreement can include clauses that maintain the confidentiality of the settlement sum, the circumstances leading to the agreement, and any other sensitive business information that might be at stake.
  • Reputation: Employment tribunals can sometimes attract unwanted media attention, especially if the details are controversial or if the company is well-known. By settling before any potential claim, the employer might avoid bad publicity.
  • Control: By negotiating a settlement agreement, the employer has more control over the terms than they would if the case went to an employment tribunal, which can result in unpredictable outcomes.
  • Certainty and Finality: Once a settlement agreement is signed, and the employee receives the agreed sum or benefit, they can’t bring a claim on the matters specified in the agreement. This gives the employer peace of mind and finality.
  • Relationship Preservation: If both parties wish to part on amicable terms or there’s a possibility the individual might return to the company in the future, a settlement agreement can be a less adversarial means of resolving disputes.
  • Flexibility: A settlement agreement can be tailored to fit the specific needs of the situation. This might include references, outplacement support, or other non-monetary benefits that might be helpful to the departing employee.

However, for a settlement agreement to be legally binding, certain conditions must be met:

  • The agreement must be in writing.
  • It must relate to a specific complaint or complaints.
  • The employee must receive legal advice from a relevant independent adviser on the terms and effect of the proposed agreement.
  • The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from the advice.
  • The agreement must identify the adviser.
  • The agreement must state that the conditions regulating settlement agreements under the relevant laws are satisfied.

If you’re considering offering a settlement agreement or need advice tailored to a specific situation, please give us a call at Astons Solicitors.

Written by
Astons Solicitors