Are settlement agreements a common sense arrangement when employers and employees need to part company or are they overused? McCormicks Solicitors’ Head of Employment Iain Jenkins sets out the arguments.

Settlement Agreements – An Overused Cop out or a Common Sense Clean Break?

Where would employment lawyers be without the common-or-garden settlement agreement?

It would be easy to perceive them as an instrument used by employment lawyers to bolster their fee income, with lawyers often being responsible for the drafting on behalf of employers, and independent lawyers being instructed to sign them off on behalf of the departing employee. The contribution to the employee’s legal costs is often hard fought-over in any negotiations.

The settlement agreement is one of the few ways an employee can contract out of their rights to bring a claim in the employment tribunal. There are prescriptive drafting requirements, and these are often added to with numerous clauses covering what happens on termination and afterwards. The agreements may be used as part of the protected conversation route where there might be performance issues at work for example, and to deal with the outcome of without prejudice negotiations in other disputes.

Rather than being a way for lawyer to add to their bills, there are advantages which can make settlement agreements an attractive way to ensure an agreed outcome. They are:

• A neat and sensible way of exiting an employee where there are concerns; it can be a win-win for both.
• It brings an issue to an end and frees up management time.
• There is no legal liability going forward.
• The financial outcome is certain.
• As part of any negotiations, an employer can update restrictive covenants and confidentiality obligations, for example.
• Employers can get themselves out of a pickle when things have perhaps not been done by the book, though we must, of course, recognise how these agreements might have been abused in the past with sexual misconduct claims.

There are, perhaps, also disadvantages, or at least things employers should think about, before going down the settlement agreement route:

• It might become an easy option. Managers get used to having them in the background and become lazy when dealing with workplace issues. Employers may then get a reputation as a settling organisation.
• A settlement agreement requires a lawyer or other appropriate representative on the other side, which can lead to long drawn out negotiations.
• A settlement may not be reached if the employer or employee have unrealistic expectations. What do we do then?
• The process might subsequently be challenged and employers should make sure they get proper advice on the do’s and don’ts of without prejudice negotiations/protected conversations.

Reflecting on these pros and cons, settlement agreements are a useful tool for both employer and employee. Indeed, there is no reason why employees cannot suggest them if they are looking for a negotiated outcome. They should not be used by management to abdicate their HR responsibilities. It might be said that they are overused in some obvious redundancy situations, but at the end of the day a settlement agreement draws a line and should mean no future claims.