Settlement Agreements: A Guide for Employers

settlement agreements
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In a recent case (Bathgate v Technip), EAT has ruled that settlement agreements cannot be used for future claims. They found that the agreement must relate to a particular complaint, which was not the case previously as earlier case laws allowed settlement agreements to include all claims. However, despite its reduced scope, settlement agreements remain to be an important element when terminating employment.

If you are new to the world of employment law or are just looking for more clarity on settlement agreements, this guide is for you. Through this, you will get an idea of what a settlement agreement is, as well as find answers to some commonly asked questions.

What is a Settlement Agreement?

To describe it in easy terms – it is an agreement between an employer and an employee, and it usually comes into effect when ending an employee’s role in the organisation. Prior to 2013, these used to be called compromise agreements. At times, these agreements can also be used after the termination of someone’s employment.

This agreement is written, legally binding and is drafted to offer a sum of money to an employee. In exchange, the employee agrees that they would not bring legal claims against the employer. Prior to Bathgate v Technip, settlement agreements could be used to waive all present and future claims as well. Now, the EAT has decided it will only be valid if there is a particular claim in the situation.

When Can an Employer Use a Settlement Agreement?

There are a range of reasons why an employer may need to use a settlement agreement such as

  1. If an employee has breached their contract of employment in some way or there are performance issues. The reason an agreement like this can come in handy is that the employee is likely to file for an unfair dismissal case (as long as they meet the time in service criteria).
  2. With mass redundancies becoming a trend these days, you never know when your organisation may need to follow suit. In such cases, it is helpful to have a settlement agreement in place, so employees don’t feel like they are being abandoned. These agreements will help terminate employment legally while also offering some amount of money to the employees.
  3. Finally, if you are in the wrong, having a settlement agreement in place with the aggrieved party will reduce the chances of a lengthy (and expensive) lawsuit.

How Much Does It Usually Cost?

When it comes to the total cost of settling with an employee, there are a few factors that need to be considered. The first thing is the cost that the settlement agreement is willing to offer the employee. For this, in addition to the contractual payment that they are owed, an employer will also have to include any notice period pay, holiday pay which was not taken, and even termination payment.

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In the case of redundancies, redundancy pay may also have to be included. This is not an exhaustive list and may include other payments based on what the parties decide. In addition to this, an employer will have to factor in the employee’s legal fees. To top it off, the employer’s legal fees will also have to be added to the final cost.

Advantages and Disadvantages

Since the reason behind offering a settlement agreement can be varied, the number one advantage is that no matter what happens, if the employee accepts the contract, they are legally forbidden to tarnish their employer’s reputation. This works out well in either scenario where the employer may or may not be at fault.

On the other end, the employer will have to pay for the employee’s legal consultations during this process which can be seen as a disadvantage. The idea behind a settlement agreement is to offer substantial, but not unreasonable, compensation to the employee. However, the employee’s legal consultations can be a heavy amount when factoring in settlement costs.

The only silver lining is that should the employee choose to bring a claim, the employer will not have to make contributions to their legal fees. It does pose a risk, but it still is a win-win situation.

For more information on settlement agreements, get in touch with employment law specialists at Redmans Solicitors.


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