Settlement agreements, which were previously known as compromise agreements, are used to end an employment relationship or resolve a workplace dispute on mutually agreed terms.

More often than not, they are offered by an employer to avoid formal procedures, such as disciplinary or redundancy processes, or settle potential legal claims. They are documents which set out terms and conditions agreed by the employer and employee (or former employee). This article talks through what a settlement agreement is, what should be covered in an agreement, when they can be offered, and their pros and cons.

Key Features of Settlement Agreements

• They are legally binding
• They can waive an individual’s rights to bring a claim covered by the agreement
• The employee usually receives some form of financial payment, and also often receives a reference as part of the agreed terms
• They are entirely voluntary, and mutually agreed. Neither party has to enter into one if they do not wish to. 
• It is a process of discussion and negotiation. Initial terms do not have to be accepted.
• Negotiations are confidential, whereby, if an agreement is not reached, the negotiations may not be admissible to an employment tribunal. 

When might settlement agreements be used?

1. Ending Employments Relationships

• Redundancy: In the case of redundancy, a settlement agreement may be offered to avoid a lengthy and potentially contentious process
• Disciplinary or Capability issues: To potentially avoid formal disciplinary or capability processes that would be stressful, time-consuming and high risk, a settlement agreement could be sought to terminate employment. 
• Mutual Agreement:  A settlement agreement can be offered when both the employee and the employer agree it’s best to end the employment relationship.

      2. Resolving Disputes

• Potential Legal Claims: Where an employee has raised a grievance or is threatening a legal claim, such as unfair dismissal or discrimination, a settlement agreement can be used to settle the dispute and reduce the employer’s liability.
• Post-Termination Restrictions: In this case, a settlement agreement can be used to adjust or confirm post-termination restrictive covenants, such as non-compete clauses, in employment contracts.

The Pros and Cons of Using a Settlement Agreement

Pros:

• They can provide a timely and confidential end to an employment relationship that is not working
• They can avoid the time, cost and stress to both parties which a tribunal claim may bring
• They can provide compensation and, more often than not, an employment reference.

Cons:

• They have a potential cost to paying an agreed financial termination payment to the employee
• There could be a risk to the relationship between the employee and the employer if a settlement is not agreed.

What Should be Covered in a Settlement Offer?

Whilst what should be offered is for each employer to determine depending on the circumstances, offers can include a proposed financial payment, or termination payment to the employee, a reference, a proposed termination date, statutory payments (such a pay in lieu of notice and accrued annual leave), contribution to legal fees and any post-termination restrictions.

Following initial discussions, a formal agreement should be produced in writing, and the employee has to obtain independent legal advice. Reasonable time should be given for consideration of an offer, and as a general rule this should be a minimum of a 10 calendar days, unless agreed otherwise.

What Happens if a Settlement Agreement is Not Honoured?

Should any part of a settlement agreement not be honoured - for example if the employer does not pay the financial payment agreed, or the employee breaches confidentiality - then a claim for breach of contract and damages can be brought.

Ultimately, settlement agreements can be beneficial to both employees and employers, depending on circumstances, but could also sour employment relationships if not handled with care and thought.