Why do employers use settlement agreements?

The easy answer to that question would be that a settlement agreement gives employers peace of mind that a departing employee isn’t going to sue them, will return their phone and swipe card and not post nasty things on Facebook. A settlement agreement  is a legally binding contract between employer and employee that (usually) sees the employer give the departing employee a sum of money in turn for that person agreeing to give their legal rights in respect of fair dismissal, discrimination and breach of contract.

However, that answer doesn’t really give any clues as to why an employer has proposed a settlement agreement in the first place.  Is it because a dispute has arisen or because a redundancy is on the cards?  How many employers resort to them in any event?  xPert HR, the online publisher of HR news and information produced research a few days ago that gave an interesting insight into what motivated employers to offer a settlement agreement.  The research was apparently conducted amongst 471 HR practitioners from (mainly) small employers predominantly in the private sector but also in manufacturing/production and the public sector.

The research asked the respondents to say in what type of situation they would think of utilising a settlement agreement to resolve the dispute. Amongst private sector respondents the most commonly cited reason (at 70.5%) for offering a settlement agreement was to resolve a professional disagreement or a relationship breakdown between employer and employee.  Interestingly this response does not include senior executive departures which one might think might also cover professional disagreement or relationship breakdown.   In the public sector a more clear cut reason at 65.5% of respondents for dusting off the settlement agreement template was where the public authority considered that the cost of preparing for a tribunal claim outweighed the cost of offering  a settlement agreement, although we are not told at what stage that assessment would be made. However, where the employer assessed the employee’s prospects of succeeding with their claim as being good, settlement agreements would only be used by 51.7% of those questioned, which suggests that many employers are very hard nosed and prepared to take their chances at Tribunal, or a COT3 was used via ACAS.

My favourite answer was that given by 54.6% of respondents who would use a settlement agreement to avoid the possibility of reputational damage.  That is worth noting to employees because if I had a pound for every employee who said that their employer would settle the dispute  rather than  fight on because of adverse publicity I would be a rich(ish) man.  Repetitional damage is clearly a significant factor but not overwhelmingly so.  Having said that, the categories of answers are also annoyingly vague because both professional disagreements and senior executive departures presumably also include an element of making sure the whole dispute went away quietly and without causing a fuss in the outside world.

According to the research 83% of those questioned had used settlement agreements at least once in the previous year and it is only the biggest employers that used them most regularly.  If you’re hoping to get a settlement agreement it probably helps if you are a senior(ish) executive in the private sector or be working  in the public sector but with a strong claim – assuming that you can afford the few charged by the ET, or have a Union or insurer that will pay.

The most common clause used by employers was to do with confidentiality of the agreement (92.8%), followed by agreeing the wording of references at 87% and returning company property at 85%.  Other clauses used were: paying in lieu of notice 79.1%, financial settlement in addition to any payment due (e.g. notice, holiday, other contractual payments)  69.5%  and inserting post-termination restrictive covenants at 52.2%.

Many employers don’t use settlement agreements at all, which suggest they are either lucky not to have had any employment disputes, or just fly by the seat of their pants.  Settlement agreements are a constructive and valuable resource for preventing disputes from exploding and leading to more intractable and, inevitably, more expensive litigation.

I love ’em.

Michael Scutt, Employment Solicitor 

Employment solicitor with Crane and Staples, Welwyn Garden City, Hertfordshire. Blogger & writer. I like cycling, cricket, football and history.