Is A Settlement Agreement The Best Option For An Employment Dispute?

When a working relationship breaks down it can often result in or be due to a dispute between the employee and employer involved. In such circumstances, it can sometimes be beneficial to both parties to have in place a legally binding settlement agreement to end the relationship in an amicable way.

What is a settlement agreement?

A settlement agreement is a legally binding contract between the employee and employer that outlines the terms agreed upon at the end of the working relationship.

Settlement agreements may be used in different circumstances, such as:

  • When an employee’s role is at risk of redundancy (to avoid the need for consultation)
  • When an employee has resigned; or
  • When an employee and employer are unable to resolve an existing dispute.

When a dispute arises, settlement agreements can often include an employer paying the employee a sum of money, in return, the employee would agree to not pursue an Employment Tribunal claim against their employer.

In order for a settlement agreement to be legally binding on both parties, an employee must obtain independent legal advice on the contents of the agreement so they understand what it means.

What are the key benefits of using a settlement agreement to bring the employment relationship to an end?

There are many benefits to ending a working relationship by using a settlement agreement such as:

Mutually joint resolution

A settlement agreement enables both parties to come to a mutually joint resolution in which both participants are comfortable to move on. This avoids costly litigation and is less time-consuming in comparison to going through an ongoing Employment Tribunal.

Financial considerations

A settlement agreement usually gives the employee particular financial or other considerations in agreement for the employee not to bring any legal claims against the employer. The financial consideration can consist of payment in lieu of notice, severance pay, and/or a continuation of benefits.

Confidentiality

The majority of settlement agreements will include provisions for confidentiality, which can be beneficial to both the employee and employer. This helps protect the reputation of both parties as it stops the disclosure of sensitive information relating to the termination of employment. Care has to be exercised as there are certain things that cannot be bound to confidentiality (i.e. certain “gagging” clauses are prohibited).

Clarifies end of employment

A settlement agreement provides clear terms in respect of the end of a working relationship and will provide clarity to any of those terms, such as severance pay and any benefits or considerations included. Clarifying the terms helps stop any confusion and is a way to end the working relationship on mutual grounds.

Legal rights

A correctly drafted settlement agreement will provide both parties with legal protection. For example, for the employer, it will help stop any potential claims being issued against them and for the employee, it can help ensure all agreements have been met.

What requirements must be met for a settlement agreement to be legally binding?

In England and Wales, there are certain requirements that must be met for a settlement agreement to be legally binding.

Firstly, the agreement must be presented in writing and relate to a specific claimant or dispute. Then, the employee would have had to receive advice from a relevant independent adviser (for example a Solicitor) in regard to the terms and effects of the settlement agreement. Lastly, the agreement would need to identify the adviser who provided that advice and must include that the relevant legislative requirements have been met.

How can we help?

If you would like any advice or information in relation to the subject discussed in this article, please contact a member of our expert Employment Law team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.

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