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Can I offer an employee a Settlement Agreement?

26th Jun 2019
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When can I offer an employee a Settlement Agreement?

Settlement Agreements (previously known a Compromise Agreements) are legally binding documents that can be offered to employees on a ‘without prejudice’ basis. The purpose of a Settlement Agreement is to bring the employment contract to an end on agreed terms and gives the employer the reassurance that the employee will not present a claim to an employment tribunal once the Settlement Agreement has been approved and executed.

Minimising risk for the employer

Protecting employers from the risk of an employment tribunal claim is an issue that we are frequently instructed on. The concern of employers has increased following the relatively recent abolition of employment tribunal fees. From a commercial perspective offering a Settlement Agreement to an employee can make sound financial sense and minimise risk.

When is a Settlement Agreement appropriate?

A Settlement Agreement and the terms offered are strictly confidential and can be put to employees in the following circumstances:

  • Where there has been an irretrievable breakdown in the working relationship
  • If the employee has been put at risk of redundancy and the employer, for whatever reason, does not want to follow the formal redundancy process which can be time-consuming and resource intensive
  • If the employee has expressed that they wish to leave employment and not work their notice period
  • Where the employer does not want the employee to work their notice

A ‘blame free’ document

A Settlement Agreement does not attribute blame to either party and the document, in order to be binding, needs to be approved by a representative of the employee (typically a solicitor) and signed by both the employee, the employer and the legal representative for the employee. Until the document is signed by all three parties the Settlement Agreement remains ‘without prejudice’ and ‘subject to contract’ and this means that the document is not binding until executed i.e. the terms of the Settlement Agreement can be changed/amended as per the terms agreed between the parties. In order to make the process as seamless as possible employers will frequently offer to pay the legal costs of the employee in seeking urgent legal advice on a Settlement Agreement and the employer usually offers to meet the employee’s legal costs of between £250.00 - £500.00 + VAT for obtaining this advice.

A quick and effective solution

The document can be prepared and drafted relatively quickly, and it is not uncommon to find that a client instructs a solicitor to prepare a Settlement Agreement on the Monday and by Friday the Settlement Agreement is executed and the employee has left their employment on agreed terms.

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