Ending Employment on the Right Terms: What a Settlement Agreement Means for Employers

When an employee leaves your business, the process isn’t always simple. Whether due to redundancy, workplace issues, or a mutual decision to part ways, using a settlement agreement can help protect your business and provide a clear, smooth exit.

What Is a Settlement Agreement?

A settlement agreement is a legal contract between you and your employee, usually made when their employment is ending. It sets out the terms of their departure and often includes a payment or other benefits in return for the employee agreeing not to take legal action against your business regarding their job or the way it ended.

The main benefit of a settlement agreement is that it gives certainty. Instead of facing the stress, cost, and time of employment tribunals or ongoing disputes, both sides can agree to move on with clear terms and less risk.

When Should You Use a Settlement Agreement?

Settlement agreements can be useful in many different situations, including:

• Redundancies: A settlement agreement can go beyond standard redundancy pay and help you offer a fair package that reflects the employee’s time and contribution.
• Workplace issues: If there are problems with performance or working relationships, a settlement agreement can provide a quick and respectful way to end the employment.
• Mutual decision to part ways: When it’s clear the working relationship is no longer working, a settlement agreement can make the exit smoother and avoid future problems.
• Complaints or claims: If an employee raises concerns about discrimination, harassment, or other serious matters, a well-handled settlement agreement can help resolve things in a careful and private way.

What Does a Settlement Agreement Usually Include?

Each agreement is tailored to the situation, but most contain:

• A final payment: This might include extra redundancy pay, or a lump sum to reflect possible claims. The first £30,000 of certain payments is usually tax-free, depending on the details.
• A job reference: Many agreements include an agreed reference to help the employee move on, which can also help avoid disputes over future job applications.
• Continued benefits: Health cover, pension contributions or other benefits may continue for a short time to help with the transition.
• Confidentiality: Both sides usually agree not to speak badly about the other, helping protect your business and reputation.
• Garden leave: You might choose to keep the employee away from work during their notice period, while still paying them.

What the Employee Is Giving Up

By signing a settlement agreement, the employee gives up their right to take legal action against your business over their job. This might include claims of unfair dismissal, discrimination, unpaid wages, or breach of contract. As this is a big decision, they must take independent legal advice otherwise the agreement will not be valid.

Why Legal Advice Matters

For the agreement to be legally binding, the employee must get advice from a qualified lawyer or adviser. This helps them understand what they’re signing and gives them peace of mind.

As the employer, you would normally pay for this legal advice. Doing so shows you are acting fairly and also helps avoid delays or problems with the agreement being signed.

Tips for Employers Using Settlement Agreements

Here are a few practical tips to make the process smoother:

• Act early but fairly: Start the conversation before problems escalate. Don’t rush the employee. Be clear and professional.
• Record everything in writing: Keep a clear record of all offers and terms. This protects your business if there are any questions later.
• Use standard wording: Stick to simple, common legal terms. Avoid anything confusing or too complex.
• Offer to pay for legal advice: Most employees expect this, and it helps ensure the agreement is valid.
• Stay respectful: Even if the situation has been difficult, keeping actions and communication polite and respectful helps protect your company’s image and reputation.

Final Thoughts

Settlement agreements aren’t just about ending employment – they’re about managing them properly. When handled the right way, they can save time, reduce stress, and protect your business from legal trouble.

They also show your business cares about being fair and responsible, even when parting ways with staff. That’s good for morale, your company culture, and your long-term reputation.

If you’re unsure about any part of the process, speak to a legal adviser. The cost of getting it right is usually far less than the cost of getting it wrong.