Settlement Agreements: What they are and how to make them work for your business

Given the inevitably of employee disputes, settlement agreements—to appease disgruntled staff while protecting the employer—are essential to your business.

Image of cut out lady justice statue representing a fair settlement agreement

As a document ordinarily drafted by lawyers, a settlement agreement is an expense many businesses don’t want to deal with, which is where a reliable template form of settlement agreement can come in handy. However, not all templates for settlement agreement are equal, and you don’t want to run the risk of leveraging a document that fails to adequately protect your business interests.

So, what should a settlement agreement include? What are its benefits? And how should settlement agreements be negotiated? We explain all of these points, and more, in plain English throughout this article.

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Let's start with the fundamental question:

What is a settlement agreement?

Let’s start with the basics: what is a settlement agreement? A settlement agreement is used when an employee (either current or former) and their employer need to address a dispute or manage an exit. This is often (but not always!) used when the employee has been dismissed or is going to be dismissed.

A settlement agreement is used to avoid an employee (or former employee) bringing a claim to the employment tribunal or to the court against their employer (or former employer). This involves the employee (or former employee) waiving their right to bring legal claims against their employer (or former employer), in return for a compensation package.

A settlement agreement can be a cost-effective and time-efficient means of handling a dispute. However, you want to ensure that your agreement is truly fit-for-purpose. As a settlement agreement acts as a legal document, you ideally want something that’s been drafted by a team of lawyers.

Fortunately for you, Docue provides an easy-to-use settlement agreement hand-crafted by a team of expert lawyers. Our template includes a number of key sections designed to result in an agreement that keeps everyone happy. Use this settlement agreement - made and maintained by lawyers

Settlement agreement vs compromise agreement?

When researching the world of settlement agreements you may come across the term “compromise agreement”. Is this another document you should be aware of? Not quite. A “compromise agreement” was in fact the original name for settlement agreements until 2013, after which it changed to settlement agreements as it’s known today.

BTW: If you are using Docue for draft settlement agreements, there's no need to worry about staying up to date with the terminology though. Our lawyers continuously maintain and update the template contracts and documents on the Docue platform, and so if the settlement agreement takes on a new name in the future then that change will be reflected in the templates available on the Docue platform.

What are the benefits of settlement agreements?

Settlement agreements can greatly benefit employers and employees alike, by empowering both parties to reach a conclusion with minimised hassle. Let’s break down some of these benefits in more detail.

What are some benefits of a settlement agreement for a business (the employer)? Settlement agreements can bring the following benefits for an employer:

  • Facilitate the smooth exit of an employee.

  • Avoid the time and cost of lengthy internal processes, meetings and investigations.

  • Avoid the cost and time put into defending legal claims at an employment tribunal or court.

  • Avoid or mitigate reputational damage.

  • Reduce the cost of dealing with an employee’s exit or dispute, compared to the damages that otherwise may have needed to be paid to the employee after a successful employment tribunal or court claim.

What are the benefits of a settlement agreement for an employee?

  • Avoids the cost, time, hassle and stress of taking a claim to an employment tribunal or court, and the potential publicity that goes with it.

  • A quicker route to getting a severance payment or compensation package than a potentially lengthy period of litigation.

What are the benefits of a settlement agreement for both parties?

It offers certainty, reassurance and closure, rather than having to wait for an employment tribunal case or a court case to conclude.

Helps maintain a relationship. Settlements don’t have to end on an awkward note and can be a good route to maintaining a good relationship with an ex-employee that the business might want to work with again in future. In fact, some settlement agreements can provide for the employee to remain employed by the employer after the settlement agreement has been signed and implemented. So in that example a settlement agreement can actually be used to not only resolve the dispute but also to preserve the relationship between employer and employee.

Increased control. Both parties agree to the certain and written terms of a settlement agreement, rather than having the uncertainty of an employment tribunal decision or a court decision.

When to initiate settlement discussions?

Settlement discussions will ordinarily start when a potential claim by an employee (or former employee) arises against their employer (or former employer) and can be started by either the employer or the employee. This might be when an employee is involved in ongoing disciplinary or grievance processes, is dismissed, or otherwise indicates they may bring a claim. A settlement can also be offered where an employer wants to exit an employee from the business, but there is no existing dispute.

How are terms decided within a settlement agreement?

Understandably, there’s likely to be some back and forth when it comes to deciding upon the terms of a settlement agreement. Usually, one party (often the employer) will provide a settlement agreement offer letter and the first draft of the settlement agreement for the employee to consider. These can be communicated in writing or face-to-face, and a settlement agreement can provide a particularly useful starting point.

Negotiations of these settlement agreement terms will depend on how strong either party’s position is and how willing they are to push for what they want. Ultimately, the terms should be mutually agreed and signed by both parties.

Negotiating the settlement agreement

It’s important to note that to make a settlement agreement legally binding, the employee will need to get legal advice from a relevant independent adviser on the terms of the contract. Employers will usually pay a contribution to the employee’s legal fees, but they’ll want to avoid paying for the lawyer to negotiate on the employee’s behalf. It is the norm for the employer to set a maximum that they will contribute to legal fees, and this will usually be set out within the settlement agreement offer letter and within the settlement agreement itself too. This is usually in the region of £500.

Usually, settlement agreement discussions will be marked as “without prejudice and subject to contract.” But what does this actually mean? If communications are genuinely “without prejudice” this means that if a claim was brought by the employee (for example, if settlement agreement negotiations broke down) then discussions about that settlement agreement could not form part of the case or be brought before the employment tribunal or court.

This is to encourage both parties to negotiate in good faith and to try their best to settle, or to offer the best terms available. The communications being “subject to contract” will mean that the parties can offer terms, but will not be bound by them until they are formalised in the final settlement agreement.

Settlement agreement negotiations should always be confidential

Many might not be aware that settlement agreements are not automatically confidential. This can be an issue for many reasons, not least for the employer who can suffer reputational damage if the details of a settlement agreement are disclosed publicly.

A well-drafted settlement agreement should include an appropriate confidentiality clause - or a signed NDA incorporated in the agreement. This ensures settlement agreement negotiations and terms remain confidential, an employer’s reputation is protected, and other employees are not encouraged and inspired to seek similar settlement agreements.

Is a settlement agreement legally binding?

In order for a settlement agreement to be legally binding, it needs to meet a number of set criteria:

It should be made in writing and it will need to state the conditions that regulate the  settlement agreement.

If appropriate, the settlement agreement should refer to a "particular complaint" or "particular proceedings”. For certainty, be sure to state this in the settlement agreement.

Additionally, the employee or worker must have received legal advice from a relevant independent adviser. This adviser must be identified in the settlement agreement and must have insurance in place. This adviser needs to advise on the terms and the effect of the proposed settlement agreement and its effect on the employee's ability to pursue claims before an employment tribunal or court.

And yes, in case you are wondering: settlement agreements can be signed electronically. Docue offers a secure and legally binding way to sign any contract online.

Settlement agreement payments & non-financial terms

Now to the tricky part: settlement agreement payments. How much should be paid in a settlement? What non-financial terms might you include? And what is an average compensation figure within settlement agreements?

The answers to these questions depend on the facts and circumstances potential (in particular, the chances of success and the value applicable to the employment tribunal claim or court claim that the employee may be able to bring against the employer). With that in mind, it’s very difficult to give an average settlement agreement payment, as financial compensation and severance packages are dependent on such a broad range of factors. It is worth noting, however, that there is no minimum pay-out applicable to settlement agreements.

So, how might you calculate the settlement agreement payment? Calculating a settlement agreement payment is normally based on the following factors:

  • What is the length of service of the employee?

  • Was there unfair dismissal?

  • Was there discrimination?

  • How long will it take the employee to secure a new job?

  • What’s the strength and value of the potential employment tribunal claim or court claim?

  • What’s the employer’s attitude to settlement?

Non-financial terms within a settlement agreement may include an agreed form of reference which the employer will provide to the employee's future employers and also an agreed form of internal announcement which the employer will release to the business explaining why the employee has left (or why they are leaving). Aside from those elements you won’t be surprised to learn that settlement agreements usually revolve around the monetary amount to be paid to the employee (or ex-employee).

Claims that can’t be covered by a settlement agreement

While it's possible to include a waiver for future claims within a settlement agreement, the wording must be extremely clear to ensure such a waiver in the settlement agreement is valid. However, it’s not possible to waive certain statutory rights through a settlement agreement. These might include:

  • Claims for failure to inform and consult with appropriate representatives on collective redundancies.

  • Claims for failure to inform and consult or failure to pay the compensation that is equivalent to the protective award under TUPE.

  • Claims in relation to the duty to consider working beyond retirement.

  • Claims under the Agency Worker Regulations.

  • Claims for breach of regulations 5, 6 and 9 under the Employment Relations Act 1999.

  • Claims for breach of regulations related to the Exclusivity Terms in Zero Hours Contracts. This refers to the right not to be subjected to a detriment.

  • The right to statutory maternity pay, statutory paternity pay, statutory adoption pay or shared parental pay as there is a restriction on contracting out of these payments.

  • Rights under data protection legislation (such as the UK GDPR, the Data Protection Act 2018 etc.)

Settlement agreements are voluntary agreements

You cannot force someone to enter an agreement, regardless of what type of agreement it might be. A proposed settlement agreement is an offer and the employee can refuse that offer if they don’t agree to the terms. Employers should also consult the Acas Code of Practice on settlement agreements when they choose to go down the settlement agreement route. The Acas Code of Practice on settlement agreements is available here.

As voluntary agreements, settlement agreements are not legally binding until the terms have been agreed and signed by all parties. To add to that, employees are not considered “knowledgeable” in this area, and as a result need to receive independent legal advice from a suitably insured relevant independent adviser before entering a settlement agreement, in order for it to be legally binding and enforceable.

Final Thoughts

Disputes between employee and employer are, unfortunately, part and parcel of growing a team. However, the end of a relationship need not be a bitter one, and a settlement agreement can be a particularly useful document in ensuring the employer and the employee alike leave the situation satisfied.

It's important to use a settlement agreement that’s fit-for-purpose, providing the necessary information for the employee, while successfully protecting the employer in the future.

The Docue platform ensures businesses have the tools they need to easily create, sign, manage and store settlement agreements, at a cost point that won’t break the bank. Our settlement agreement is designed to facilitate a settlement agreement that’s efficient, cost-effective, and reliable. In need of some support? Get the Docue settlement agreement template here.

Protect your business with the Docue

Docue’s platform allows you to access and customise a lawyer-made settlement agreement so that all of the details are tailored to the relevant dispute as necessary (including details regarding termination arrangements, termination payment, waivers, warranties, indemnities, and confidentiality provisions).

This can be done easily and quickly in just a few clicks by utilising the intelligent tick-box and text-box options within Docue’s next generation contract drafting technology.

Accuracy can be ensured by making use of the automated lawyer-written guidelines on the Docue platform which guide your business through each section of the settlement agreement and keep you on the right track throughout the drafting process. If you get stuck with any tricky parts of the settlement agreement creation, our lawyer-drafted guidance notes are there to help you.

When your settlement agreement drafting is complete the next step is easy, just use Docue’s e-signature tool to sign and send to the employee (or former employee) for countersignature.

Once you receive the automatic notification from the Docue platform that the employee (or former employee) has signed the agreement you can sit back and relax knowing that the Docue platform has automatically archived the signed agreement into the relevant folder.

Finally, if you ever need to look back at previous settlement agreements then the search tools on the Docue platform make it very simple to locate these in the digital archive.

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Docue Legal Team