Settlement agreements are often used when an employee’s employment is ending, but they can also serve other purposes. Here, we explain what settlement agreements are, why employers use them, and the benefits for both parties.
What Are Settlement Agreements?
Also known as compromise agreements, settlement agreements are legally binding contracts between an employer and employee. They typically provide a severance payment in exchange for the employee agreeing not to pursue a claim in court or at a tribunal.
Settlement agreements are not only used to end employment; they can also resolve workplace disputes without terminating a contract. For example, they may be used to settle disagreements over holiday pay or other employment-related issues.
Settlement Agreements Keep Matters Confidential
One of the key features of a settlement agreement is confidentiality. The circumstances surrounding the employee’s departure, the terms of the agreement, and any associated payments are kept private. Employers often use settlement agreements to prevent employees from making disparaging remarks about the business.
Once signed, an employee cannot bring a claim against the employer unless there has been misrepresentation regarding the reason for termination.
Waiving Employment Rights
Settlement agreements allow employees to waive their rights to take legal action. Employers may use them when there is a risk of claims, such as:
- Complaints of unfair treatment
- Disciplinary actions
- Redundancy disputes or appeals
When trust breaks down due to grievances or discrimination allegations, a settlement agreement can provide a mutually agreeable way to conclude the employment relationship.
Streamlining Redundancy Procedures
Formal redundancy procedures involve consultations, consideration of alternative roles, and the right of appeal. These processes can be time-consuming and administratively heavy.
Offering a settlement agreement can short-circuit the redundancy process, giving employees a larger payout than they might otherwise receive in exchange for waiving standard procedural rights. This can be particularly appealing when redundancy is inevitable.
Minimising Risk and Cost
Settlement agreements can also be a risk management tool for employers. Employment tribunal claims can be costly and time-consuming, so offering a settlement agreement can help avoid potential litigation expenses.
It is essential, however, that employers seek professional legal advice before offering settlement agreements. Likewise, employees should obtain legal guidance to ensure that accepting a settlement agreement is in their best interests.
For more information or for expert advice on business or personal legal issues, contact us by email at info@carterbond.co.uk or call us on 020 3475 6751.
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