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Settlement Agreements – DAY 2 of 3 – The Draft Settlement Agreement

11th Jan 2017

Following on from the ‘without prejudice’ meeting with Bob, you need to provide him with a draft settlement agreement in order for him to obtain legal advice. However, can you draft a good Settlement Agreement on behalf of the company? Remember that the terms of the agreement should protect the company, however, they are negotiable!

As mentioned previously, Settlement Agreements are very useful tools to an employer. They effectively draw a line under the employment relationship and therefore provide comfort to you that your employee will not bring any employment related claims against you.

In short, a Settlement Agreement is a full and final settlement of any claims which the employee is aware of or may become aware of in the future. It also sets out what the employee can and cannot do after termination of his/her employment.

Here are some tips of clauses to consider including in the Settlement Agreement:

Yes you will have your standard clauses such as confidentiality, non-derogatory statements and tax indemnity, but it is also an effective way of ensuring that your employee is compensated for termination of their employment preventing them from bringing an employment claim. This saves you a lot of time, money and stress as you do not have to defend a claim in an Employment Tribunal.

As well as these standard clauses, there are other things as well as financial ones, that you can use to encourage the employee to enter into a Settlement Agreement.

Some of the things we often see are:

  • An agreed reference – this is great for employees, but remember your obligations to ensure that it is true and fair.
  • Continuation of employee benefits post-termination, i.e. healthcare and car allowance.
  • Outplacement services.
  • Payment in Lieu of Notice – great for employers AND employees as the employee does not need to work through there notice period. In some circumstances you can ensure the tax status is protected, by making the payment a “damages payment;”

Here are some common errors we come across when a settlement Agreement lands on our desk:

  • No plan of when payment(s) will be made – the Settlement Agreement needs to clear about what will be paid to your employee and when.
  • Contractual and non-contractual payments are combined – this can affect the tax status of the ex gratia payment so needs to be expressly separated in the agreement.
  • Accrued holidays – outline the number of days and the actual payment due to avoid uncertainty.
  • Mutuality of obligation – an employee is more likely to sign the agreement if they agree to keep the agreement confidential and not make derogatory comments and you agree to do the same.
  • It is always important to consider the time period for deferred termination dates – ask the employee to re-sign the Settlement Agreement before their termination date and deal with what will happen in the event that the employee commits an act of gross misconduct before the termination date.

Employers need to remember that there is never a ‘standard’ Settlement Agreements and they are not easy documents to produce. Although you may have been using the same document for a number of years and the document has never been challenged it is important to remember that laws and best practice change over time, and one size never fits all!

It is vital to make sure you draft the agreement correctly and is valid as this could make a difference between no claim or an expensive Tribunal claim. The purpose of the agreement is to protect you, the employer, so making sure that you take the time to ensure that it is properly drafted and relevant to those individual circumstances.

You have now drafted the settlement agreement and provide a copy to Bob. In order for a Settlement Agreement to be legally binding, Bob will be required to take independent legal advice before they sign the agreement. Stay tuned to find out whether Bob will sign the agreement?

If you would like some advice on drafting a Settlement Agreement please contact

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