A Guide to Settlement Agreements

 

There are a number of reasons as to why a business might look to restructure. They may be doing so to cut costs, for process improvements, technological changes, or simply when employee(s) are not performing well.

One of the biggest factors in restructuring is often redundancy, but with redundancy comes risk to your business, in the form of employment claims and compensation, defence costs and/or adverse publicity, all of which may work out more expensive in the long run.

If you are wishing to make redundancies but want to protect your business, then a settlement agreement may be the best option for you.

What is a settlement agreement?

Settlement agreements (formally known as compromise agreements) are mutually beneficial for both the employee and employer, providing protection for both parties, when a redundancy is in process.

A settlement agreement is a legal contract between an employee and their employer enforceable by both parties. Once legally complete, this agreement offers great protection to a business as it is often confidential.

Both parties contractually agree to the terms of an employee exiting employment from their place of work. The terms being that the employee ceases to pursue any related grievances and waivers all rights to make claims against their place of work or rights of action against a business’s directors or employees, removing any risk which may come to your business in the future.

What is included in a settlement agreement?

  • A termination date, showing the exact date the employee exited employment from a business
  • Contractual and ex-gratia payments
  • Payment terms
  • A reference from the employer
  • A confidentiality agreement

Both employers and employees entering into a settlement agreement to seek independent legal advice and take their time to ensure that all agreements are carefully drafted.

Employers aren’t legally obligated to pay an ex-gratia payment, but they are often used in settlement agreements as a gesture of goodwill depending on the circumstances by which the employee is leaving the business.

When can a settlement agreement be used?

Settlement agreements can be used in a number of situations including but not limited to:

  • Redundancy
  • Restructuring after lay-off
  • Short-time working or furlough leave
  • Variations of contracts of employment
  • Employment disputes
  • Director disputes
  • When dealing with employee grievances
  • Disciplinary matters for misconduct, poor performance
  • Long term sick and ill-health retirements

Must dos for businesses

As a business, you should seek advice as early as possible so that the overall redundancy situation can be thoroughly assessed and legally reviewed.

You can understand the general consensus of a settlement agreement but this does not mean that you can use one without having a deep understanding of where and how one should be used. It is essential to be strategic and to make sure that all content is drafted in an appropriate manner. This will provide protection for your business and prevent future headaches.

Seeking advice from a legal professional will mean that guidance can be provided and a strategy can be formed regarding the introduction of the settlement agreement to an employee.

Redundancy is never easy for an employee and could prove to be upsetting for some, so seeking advice will ensure that as a business you can correctly ‘sell’ the agreement to them, as well as helping you deal with any negotiations and help you to conclude matters quickly.

What is the goal?

To avoid protracted formal processes, remove risk, and simply get on with business.

If you require advice or assistance with restructures, redundancy or drafting, implementation, negotiating or concluding settlement agreements, contact a member of our team today.  Mulderrigs are now part of the Farleys Solicitors family and we can put you in touch with our employment law specialists. Call us on 0800 0523 693 or contact us by email.