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Businesses and settlement agreement law

Is a current or former employee taking – or threatening – legal action against your business? You might want to seek a settlement agreement. First4lawyers can help.

If an ex-employee agrees to sign a settlement agreement you offer them, this could prevent a lengthy legal battle that takes up too much of your time and costs your business in the long run.

But before you offer an agreement, it is vital that you set terms which protect your interests within the letter of the law.

At First4lawyers, our expert employment and business solicitors are here to help you do just that. For specialist advice that could save you time and money, contact First4lawyers.

What are settlement agreements?

Settlement agreements, formerly known as compromise agreements, are written documents that set out the terms and conditions to settle a dispute between your business and a current or former employee.

The dispute may arise from a claim by the employee for a grievance against you. This could follow a dismissal, redundancy, or even resignation. More specifically, the grievance could relate to the following:

  • Wages or salary has not been paid in full (perhaps relating to bonuses).
  • A contractual right to wages/salary in lieu of notice (PILON).
  • A failure to respect the ex-employee’s statutory rights (Employment Rights Act 1996).
  • A breach of the contractual terms of their employment e.g. you have not given enough notice prior to dismissal.
  • Discrimination on the grounds of things such as sex, religion, marital status, or colour.

What are the advantages of settlement agreements for employers?

If the employee has legitimate grounds for a claim against you in UK law, there are many advantages to offering them a settlement agreement:

  • May provide a quick and dignified end to an employment relationship that is no longer beneficial to your business.
  • Saves time, cost and stress – allows you to get on with running your business.
  • Can prevent your employee from making derogatory comments – a confidentiality clause may help preserve the good name of your company.
  • It waives the employee’s rights within their employment contract and ends your association with them.

However, settlement agreements also come with possible disadvantages. These include the following:

  • You must pay a guaranteed financial sum to the employee to sever your relationship with them.
  • If they do not agree to the settlement you may have to risk their on-going employment if they have not yet been dismissed, and further disputes.
  • It could risk healthy relations with the wider workforce if you offer the agreement as a substitute for good management or otherwise inappropriate behaviour.

How is a settlement offer made?

It could be helpful to make a verbal offer to gauge their response to the terms of the agreement. It would then be advisable to put the offer in writing to help avoid any misunderstanding.

Bear in mind that when compromise agreements became settlement agreements, it became possible for pre-termination discussions to be confidential, which means they cannot be used as part of a later unfair dismissal claim even when there is no current dispute (i.e. the proposed agreement comes out of the blue for one party).

A written offer will outline the terms you propose to include in the agreement – for example, the amount of compensation you wish to offer. The final settlement agreement must then be put in writing in line with UK law – for which you will likely need legal advice, such as the kind First4lawyers provides.

The employee must seek independent advice from an expert advisor for the settlement agreement to be valid.

What terms should we include in the settlement agreement?

The terms of the agreement will usually depend on the specific circumstances of the case. For example, the basis of the employee’s claim, such as lack of notice, inadequate wages, or unfair dismissal. You may wish to take the following criteria into account:

  • Length of time employee has worked for you.
  • How long it could take to resolve the issue if you cannot reach a settlement.
  • The potential costs and liabilities of losing an employment tribunal case.
  • How difficult it would be to fill the post.

If after your discussions and negotiations, you and your employee agree on a settlement, you must then draw up a formal written agreement.

You may wish to include a confidentiality clause which prevents the employee from disclosing the details of the agreement, or from making derogatory comments about your company.

My business needs help and advice with regard to a settlement agreement – what should I do?

Do you wish to offer a settlement agreement to an employee? If so, you should seek expert legal advice, which you can do by contacting First4lawyers. That will ensure the document you draw up includes terms that best protect your interests in line with UK law.

At First4lawyers, we are here to guide you on the most appropriate course of action when dealing with employee disputes. At every stage of the process, our specialist business solicitors seek to give your company the legal and financial protection it needs.

To find out more, contact us, or fill in our easy enquiry form and we’ll call you.

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