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Settlement agreements

Five scenarios where a settlement agreement can safeguard your business

Nov 12th, 2021

Marie Horner, Partner

From resistance to using a settlement agreement due to fears of “setting a precedent” or “rewarding bad employees”, to their use being common practice, there really are polar views amongst employers about settlement agreements.  So, we thought we would have a look at the pros and cons.

What is a settlement agreement?

A settlement agreement allows employers, for example, to dispense with lengthy consultation procedures when restructuring, or to offer an employee (perhaps showing signs of disengagement in their role) an alternative way to move on to new pastures without an unpleasant process.  Such an approach redirects the cost of management time and ongoing salary during a procedure into a neat package with a lump sum payment in return for various promises to the business, usually making complete commercial sense and often retaining amicable relations with the individual.

Settlement agreements are used in a wide variety of situations, although historically there was perhaps often an assumption that wrongdoing was involved.  For employees there is the concern of stigma; it might be seen by future employers as an indicator of potential underperformance, or they might be considered a troublemaker in some way.  Employers fear rumours of a pay-out might result in other staff being encouraged to threaten claims in the hope of a similar result.  Those concerns may have some justification, but for many employers, a settlement agreement simply represents a clean break with obvious benefits for both parties, and no negative undercurrent. 

For the most part, the main benefit of a settlement agreement for both parties is finality – a line is drawn, and each party moves on with no further fallout.  However, for the employer, there can be a number of other key benefits, and we set out some of those below.

Five situations where a settlement agreement is really useful 

From reducing cost and wasted management time to rectifying deficiencies within a contract of employment to protect risks to your business, a settlement agreement can be a really useful tool.  We take a look below at five of the potential benefits.

  1. Restriction of post-termination activity

The employee may have started out at a junior level but be leaving as a key member of the business.  If the contract hasn’t progressed with the employee, there may be no, or insufficient, restrictive covenants in place.  A settlement agreement can rectify that with potentially increased prospects of successful enforcement should there be a breach.

In a similar vein, the employee may have built up significant relationships with some of your customers, but their contract of employment doesn’t allow you to place them on garden leave, to sever those relations whilst retaining control of their activities during their notice period.  This can be rectified within a settlement agreement.

  1. Protecting confidential information

The employee may have had significant access to confidential information but have a very sparse (or even no) restrictions upon use of that information.  The settlement agreement presents an opportunity to fully clarify what is considered confidential, to require the return or destruction of any such information, and to lay out the consequences of failing to adhere to those requirements.

  1. Recovery of monies owed

If an employee will be leaving with monies owed to the business (such as excess holiday pay or training costs) but no provisions were included in the employment contract to recover such monies, the settlement agreement presents an opportunity to balance the books.

  1. Protecting the reputation of the business

If an employee is leaving in acrimonious circumstances, or is likely to feel wronged in some way whether justified or not, a settlement agreement can include provisions that prevent the employee from making potentially harmful comments after they leave. When times are hard in recruitment, avoiding any negative reviews from former employees can be a key factor to attracting new talent.

  1. Business decisions without lengthy process

If you want to restructure but face a lengthy and/or potentially contentious consultation process to reach your goal, settlement agreements can offer an obvious solution for all concerned.  Considering reassigning to a severance package the cost of the management time involved and the time of potentially dealing with the aftermath if the outcome is challenged, has some real merit.  The figures may be financially very enticing for the employee, and for the cost of the process that would have been followed, you have peace of mind that no claims will be brought and you could potentially retain relations with an employee who might otherwise have been openly critical of the business. 

In short, using a settlement agreement can help reach goals faster and maintain positive PR for the business. 

A word of caution on using settlement agreements though 

Whilst there are many potential benefits, there can be some down sides of using settlement agreements.  If a business only uses settlement agreements once an individual has raised grievances or started a tribunal claim, has a policy of settling to avoid tribunal hearings, and has many disgruntled employees waiting in the side-lines,  it is fair to say that a culture of staff following suite in the expectation of a settlement can develop.  It seems likely, however, that rather than the use of settlement agreements being the issue, such a situation speaks far more about the fundamental people management practices within a business.

More information or assistance?

If you would like an informal discussion about using settlement agreements, or feel that your business currently falls into the category of having disgruntled employees and you would like advice about improving staff engagement, please get in touch.  With some of our solicitors also holding CIPD accredited human resource management qualifications, we can offer broad advice focusing not only on the strict requirements of employment law, but also the wider staff management, engagement and retention issues. 

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Marie Horner


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