An Employer’s Guide to Settlement Agreements

November 24, 2020


In light of the economic impact of the Covid-19 pandemic, many employers will have to reduce their workforces by way of redundancies.

As an employer, you may want to consider whether it is appropriate in the circumstances to enter into a Settlement Agreement with an outgoing employee, allowing you to bring an end to the employment relationship in a mutually agreed way without the fear of legal proceedings being brought against your organisation in the future.

Employment lawyer Fflur Jones sets out the basics of settlement agreements for employers below:

1. What is the purpose of a settlement agreement?

A settlement agreement restricts an employee from pursuing certain legal claims against you, the employer, following the termination of their employment. They are commonly used to record an employee’s terms of departure where they are to receive a termination payment in return for the waiver of ongoing and/or future claims against their employer.

2. What are the benefits of entering into a settlement agreement?

It provides a swift end to the employment relationship for both the employer and the employee. It is also a way of preventing reputational damage to your organisation in that it can contain mutual non-derogatory clauses. Settlement agreements also have a financial advantage; by resolving the matter early, the parties can reach a resolution without incurring further time and legal costs on a potential Employment Tribunal claim.

3. How do I make a settlement offer?

If you are making an offer verbally, you should always label the conversation as “without prejudice” or a “protected conversation” before going on to outline your offer. We would also always advise that you confirm any offer in writing and also mark that written offer with the same label. The benefit of these labels being applied properly is that such offers of settlement cannot then be used against you in any future legal proceedings.

4. What are the statutory requirements for a settlement agreement?

For a settlement agreement to be valid, the following conditions must be met:

  • The agreement must be in writing;

  • The agreement must relate to a particular complaint or particular proceedings;

  • The employee must have received independent legal advice on the agreement and its effect on their ability to bring an Employment Tribunal claim;

  • The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice;

  • The agreement must identify the adviser; and

  • The agreement must state that the conditions regulating settlement agreements under the relevant provisions have been satisfied.

5. How much time should be given for the employee to consider the offer?

It is fair to give the employee a reasonable period of time to consider the proposed settlement offer and agreement. However, we would always advise that you give the employee a set deadline for returning the completed agreement. This tends to focus minds and avoids delay in getting the situation resolved.

6. What if an agreement cannot be reached?

If agreement cannot be reached, the employee will still be an employee until you terminate their employment, unless you have already done so. The employee will also still have the right to bring potential claims against you to an Employment Tribunal.

7. Do settlement agreements “gag” employees?

Settlement agreements should not prevent an employee from “blowing the whistle” to a relevant regulatory authority or reporting a suspected crime to the police. However, a settlement agreement can legitimately contain obligations relating to the employee’s duties of confidentiality, and contain mutual non-derogatory clauses.

8. Do I have to pay for the employee’s legal fees?

It is very common, although technically not a requirement, for you to pay a contribution towards the employee’s legal fees in obtaining advice on the terms of a settlement agreement. Contributions normally range between £300 – £500 plus VAT.



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Catherine Burke
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Fflur Jones
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