Understanding settlement agreements: A guide for small businesses employers

As a small business owner, navigating the complexities of employment law can often feel overwhelming, especially when it comes to managing difficult employee situations. Whether you are facing a redundancy situation, disciplinary issue, or potential litigation, one legal tool that can provide a resolution to workplace disputes is a settlement agreement.

Properly utilised, these agreements can offer a clean and efficient solution for both employer and employee, minimising the risk of litigation and protecting your business. Here, we’ll walk you through what settlement agreements are, why they are important and how small businesses can benefit from them.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee that ends the employment relationship under mutually agreed terms. Often, in return for financial compensation or other considerations, the employee waives their right to bring certain legal claims against the employer, such as claims for unfair dismissal, discrimination or breach of contract.

To be legally enforceable, a settlement agreement must meet the following key requirements:

1. Written agreement: The terms must be set out in writing.
2. Legal advice: The employee must receive independent legal advice on the terms of the agreement.
3. Clear scope of claims waived: The agreement must specify the claims the employee will no longer have the right to bring against their employer.
4. Identified legal adviser: The legal adviser providing the employee with advice must be identified and insured.

Why small businesses should consider settlement agreements

For small businesses, disputes with employees—whether over performance, conduct, or redundancy—can escalate quickly into costly legal battles. Settlement agreements offer a pragmatic solution for dealing with these issues, providing several key benefits:

1. Cost efficiency: Defending against an employment tribunal claim can be expensive. Even if you are confident of your position, the legal fees, management time and potential compensation can strain your financial resources. A settlement agreement offers a more predictable and often less costly outcome.
2. Confidentiality and reputation management: Legal disputes can damage your business’s reputation, especially in smaller communities or niche markets. Settlement agreements often include confidentiality clauses, which prevent the employee from disclosing details of the agreement or the circumstances leading to it. This helps protect your business.
3. Certainty and closure: Employment disputes can be drawn out and stressful for all parties involved. A settlement agreement provides certainty by clearly defining the terms of exit and the compensation involved. This helps you avoid the uncertainty of a tribunal ruling and ensures that the matter is resolved swiftly.
4. Maintaining employee morale: Prolonged disputes can negatively impact team morale. Addressing the issue promptly through a settlement agreement can help maintain a positive work environment and reassure your remaining staff that the situation has been resolved professionally and fairly.

Common situations where settlement agreements are used

Settlement agreements can be used in various employment situations, including:

• Redundancy: If you need to make an employee redundant but want to mitigate the risk of a claim for unfair dismissal, a settlement agreement can formalise the redundancy terms, including any enhanced redundancy pay.
• Performance issues: Where an employee’s performance is unsatisfactory, a settlement agreement can facilitate a mutual parting of ways without the need for a lengthy performance management process.
• Disciplinary situations: In cases where an employee’s conduct warrants dismissal, offering a settlement agreement can avoid the potential legal complications of a wrongful or unfair dismissal claim.
• Ill health or long-term absence: If an employee has been absent for an extended period due to ill health, a settlement agreement can provide a dignified way to end the employment relationship, often with a compensation package that recognises their situation.

Key terms in settlement agreements

Settlement agreements are flexible and can be tailored to fit the specific needs of the business However, there are some common terms that are typically included:

1. Termination date: The date on which the employment relationship will officially end.
2. Settlement payment: The amount the employer will pay the employee in exchange for the waiver of claims. This can include statutory entitlements (such as notice pay or holiday pay) and an ex-gratia payment (i.e., an additional payment the employer is not legally obligated to pay, often known as a ‘golden handshake’).
3. Confidentiality clause: This clause ensures that neither party will disclose the terms of the settlement or the dispute.
4. Non-disparagement clause: Both parties agree not to make negative statements about each other after the termination.
5. Reference: A mutually agreed reference may be included to help the employee in future job applications.
6. Waiver of claims: The employee agrees not to bring any future claims against the employer relating to their employment or termination.

Important considerations for small businesses

While settlement agreements can be highly beneficial, it’s important to approach them carefully. Some key points for small businesses to consider include:

• Negotiation: While you may be offering a settlement, the employee might wish to negotiate. It’s important to approach the process with a mindset of compromise.
• Legal advice for both parties: It is a legal requirement that the employee obtains independent legal advice for the settlement to be valid. This is an added cost, but it ensures that the employee understands the agreement, reducing the risk of future disputes.
• Get expert legal advice: Settlement agreements are complex legal documents, and getting them wrong can be costly. It’s essential to seek advice from an employment law expert to ensure the agreement is enforceable and protects your business interests.

Conclusion

For small businesses, a settlement agreement can provide an effective way to resolve employment disputes without the uncertainty, time and costs associated with litigation. Whether dealing with redundancies, performance issues or disciplinary matters, a well-drafted settlement agreement can protect your business’s interests while ensuring a fair outcome for the employee.

It is always advisable to seek professional legal guidance to ensure that the settlement agreement is drafted correctly and is legally enforceable. At Attwaters Jameson Hill, we specialise in helping small businesses navigate employment law with practical, cost-effective solutions. Contact us today to learn more about how we can assist you with settlement agreements.