Terminating employment can be a difficult time for both the employee and the employer. In situations where a workplace dispute has arisen, a settlement agreement can be a good idea to avoid the potentially length legal process of an employment tribunal.

However, there are also disadvantages to settlement agreements and the decision about whether to enter into one should be made on the facts of the situation and not generic advice about settlement agreements.

Overview of Settlement Agreements

A settlement agreement (previously referred to as a compromise agreement) is a legally binding contract between an employee and their employer, that sets out the terms of the termination of an employment contract.

Settlement agreements are usually used in situations where there is a workplace dispute between the employee and the employer and where it would be beneficial for the employment to come to an end.

The agreement is often used in cases that could go to an employment tribunal and it is common for the terms to include a payment to the employee in return for the employee waiving their right to take the employer to a tribunal.

Advantages of Settlement Agreements

On the face of it, it would seem that a settlement agreement is a good idea and it is true that there are many advantages to both an employee and an employer.

  • Easy and Timely – A settlement agreement can be entered into relatively easily, which means that the process is not drawn out and the employment can be terminated fairly quickly.

This is an advantage for both parties who will be able to move on from the dispute to seek further employment or to hire a new member of staff and mitigate any impact on the morale of existing employees.

  • Certainty Employment tribunals can be stressful and uncertain for both parties. There is no guarantee about who will win the tribunal and what the judgement will be. With a settlement agreement, both parties are involved in the negotiation and will be required to agree and sign the contract.

This gives everyone certainty over what they can expect to receive and what their legal obligations are. For employees and employers, this is often preferable to leaving the outcome in the hands of a tribunal.

  • Financial Implications An employee will often receive a larger payment negotiated via a settlement agreement than if they were made redundant or took their employer to an employment tribunal.

For employers, they can agree and budget for the payment under a settlement agreement and will not incur the costs of an employment tribunal. As the process is usually quicker, the employer will also not be required to continue paying the employee throughout a long process.

  • Confidentiality A settlement agreement will usually be confidential with both parties agreeing to not reveal the contents of the agreement and no obligation for the agreement to be made public.

If the workplace dispute would damage the reputation of either party, it will be beneficial to enter into the agreement to avoid reputational damage and to allow an employee to move on and seek employment, and the employer to continue without fear of the agreement being shared.

  • Protection It is the norm that a settlement agreement is the final stage of a process and that both parties agree to waive their rights to take out any further legal action against the other. This allows employers the knowledge that they will not be taken to an employment tribunal in the future about the issues that have been considered in the settlement agreement.

It also gives employees the peace of mind that the employer will not take out any legal action against them. A settlement agreement will often include a term about the reference that the employer can give about the employee which ensures the employee can apply for jobs without the fear that a bad reference will be given.

Disadvantages of Settlement Agreements

While settlement agreements are intended to be mutually beneficial, there are some disadvantages that should be considered.

  • Expense If an employee receives a higher payment than they would receive under other circumstances, the employer may see this as a disadvantage as they will be required to make this payment.  As an employee is required to have access to legal advice for a settlement agreement to be legally binding, the employer is likely to have to cover these costs as well.
  • Perception Whilst the contents of a settlement agreement will be confidential, the fact that an employer has entered into an agreement may be perceived as an admission of guilt. People may assume that if the employer was confident, they would have allowed an employment tribunal to happen and so agreeing to a settlement is a sign that they were not confident they would win.
  • Limiting Options This is especially true for an employee who could have a potential claim against their employer for wrongful dismissal, discrimination etc. It might seem beneficial to enter into a settlement agreement as it ensures the process is over quickly and there is a certainty of the terms, but once the agreement is signed, the employee cannot usually pursue any further legal action. Once an employee has left the employment, they may reconsider whether they made the right choice, but they will no longer have the option, regardless of how strong their case is.
  • Imbalance of Power Employers are usually in a more powerful position than employees when it comes to negotiating the terms of the settlement agreement. Employees who are on reduced pay due to lengthy sickness, are experiencing bullying or harassment in the workplace or for other reasons do not feel that they can ‘fight’ their employer, and are reluctant to enter into a legal battle. This can lead to employees feeling pressured into a settlement agreement.
  • Setting a Precedent Even though the terms of the settlement agreement will be confidential, it will be known that a settlement agreement was made. This could prompt or give other employees the confidence to take action that could lead to further settlement agreements. If an employer doesn’t enter into a settlement agreement and appears confident to defend itself at a tribunal, other employees are likely to be deterred from taking action.

For more information or assistance, guidance or representation as an employee or an employer, you can contact Carter Bond Solicitors at 020 3476 6751 or via email at info@carterbond.co.uk. You can also find valuable resources on their YouTube channel and website at www.carterbond.co.uk.

This note comprises the view of the author at the time of writing. This note is not a substitute for legal advice. Information may be incorrect or out of date and may not constitute a definitive or complete statement of the law or the legal market in any area. This note is not intended to constitute advice in any specific situation. You should take legal advice in specific situations. All implied warranties and conditions are excluded, to the maximum extent permitted by law.