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Settlement Agreements – a lesson in the art of the compromise and the importance of pragmatism

20 October 2023

I would say I advise over 200 individuals a year on the contents and effects of settlement agreements they have received from their employer. The situations in which these individuals find themselves are varied and extensive; some (more senior) employees have seen these documents before and have likely done a considerable amount of negotiation with internal players themselves prior to seeking my services. They are effectively looking for me to ‘rubber stamp’ their agreement and to move on.

Others may have never seen such an agreement before but understand the essence of the document as a compensatory (non-punitive) instrument which should aim to reflect the fair end of a working relationship. Then, finally we have some who, understandably, are so shocked and upset at being offered an exit under agreed terms or being selected for redundancy that they approach the whole process with alarm and upset. These clients can end up losing goodwill with their company and creating considerable stress for themselves in the meantime.

All these individuals require slightly different support as I help manage their agreements, but there are some key lessons that I believe both employees and employers could learn when approaching settlement agreements that would (a) make the process much less painful for both sides and (b) ensure that the deal done is the fairest possible.

  • Try to put personal feelings aside. I know that as a lawyer it is difficult to preach calmness and peace to an individual who is being faced with redundancy, but I do really believe that a level head and a measured approach will most often reach the best outcome. It is the reason that I try as far as possible to take over negotiations completely when individuals come to me. Plenty want to continue conversations with their employer themselves to ensure the organisation is fully aware of how upset/shocked they are, but that is not something I recommend. Allowing lawyers to channel the emotion and upset you are communicating into something concrete and legally useful that is going to make a difference in terms of the (often financial) outcome of the situation is almost always best. Sometimes, being overcome with emotion can even actually cloud and overshadow potentially key claims that you may be attempting to make out, which if they were outlined calmly and rationally would to have more impact on the outcome.
  • Be practical, rather than sensitive, about the agreement. Since these agreements describe and manage a difficult time in the employment life cycle, it can be very easy for employees to view every clause as an insult or as detrimental to them. In reality, settlement agreements are some of the most standard documents in law and have developed into their current position for a whole myriad of reasons. As an example, tax indemnities in favour of the employer (a common clause) are not included because you as an employee are truly likely to have to pay considerable sums for tax mistakes. These clauses are a hangover from times where payroll systems were not automated and therefore tax mistakes were slightly more common. You don’t need to fight against them, as they will hardly ever be relevant. Similarly, it should not be considered an insult (as one client of mine interpreted it to be) to receive a small amount of money carved out of a larger payment in respect of entering into confidentiality or post-termination clauses regarding the agreement itself. The use of some nominal compensation linked to these clauses is purely an operation of law; since you are entering into new obligations which survive termination, contract law dictates that you must receive ‘consideration’ (something of value) for them to be valid. As a final example, I had a senior executive recently confirm he felt happy with most of the agreement but for the agreed reference. The reference was a plain and simple confirmation of employment dates and job role, but the employee was upset that it gave no reason for his termination rather than clearly outlining that it was not linked to performance. It took me considerable effort to support this client in understanding that a non-descriptive reference is completely normal, and is likely to be looked on more favourably than a reference which mentions any reason, such as redundancy, for leaving. As with so many things in life, less is more here.
  • Be creative but fair when considering compensation levels. Quite often the individuals being selected for redundancy or offered settlement agreements will be those with less than 2 years’ service. Without 2 years’ service the employment rights available to an employee are minimal unless you can link any bad treatment to a protected characteristic or some other wrongdoing such as victimisation. As such, I am often faced with writing letters that are less legal and more strategic in manner. We make arguments for compensation that are based not on an individual’s legal right to the money but on goodwill. I often consider factors such as the state of the market, whether an individual has a visa, and the specific good work they may have done with a company to outline why they should receive uplifted compensation. It is a hard line to fight, but when you are as legalistic as possible whilst focusing primarily on non-legal arguments it can be surprisingly effective. Ultimately, realistic fairness should be the leading argument in coming to a financial compensation figure. Individuals that want to ask for double their yearly salary as a compensation payment because they are so highly aggrieved ought to be more realistic. Individuals should recognise that if the amount offered (which is tax free up to £30,000) provides cover of between 6 to 10 months of work, it is likely a good deal.
  • Manners are free, and politeness can go a long way. I understand that there will sometimes be situations in which individuals being asked to leave an organisation have significant cause for grievance. They may have been subject to discrimination, they may feel their dismissal is unfair, and I will always investigate every person’s situation to ensure I am aware of any important issues they are facing. I will then be appropriately firm in my dealings with an employer in light of this background. The most common situation I find myself advising agreements concerning, however, particularly in today’s climate, is a standard redundancy. Not enough work, too many heads. In these situations, people are understandably upset, but they are not always understanding of the position the employer is in. Employers must cut costs to survive, and it is much better to politely accept a redundancy and ensure that your compensation is fair than to go approach HR enraged at the unfairness of the situation.

If there is unfairness, that can be dealt with, but being inflammatory as you leave a company comes back to ‘bite’ employees more often than one would think. I remember one case where a client had (against advice) burned quite literally all of his bridges as he left the company by reason of redundancy, telling numerous colleagues exactly what he thought of the business. Six months later, he then found that the new company he had joined was being merged with his previous employer, and that he would likely be working with all the previous faces again. Not a nice position to be in! Similarly, the somewhat cyclical nature of growth and decline periods in most industries, technology particularly, means that you should never rule out the idea that you could end up being asked to come back by a company. Recruitment costs are huge, and companies will often choose to directly recruit a known entity who they were sad to see leave the year before than spend money recruiting more staff when business builds again. You should want to leave yourself in the best position possible to take that opportunity should it arise.

I hope these tips and tricks help you if you are managing a settlement agreement process as an employer or an employee moving forward. Settlement agreements are helpful tools, and they can be put to better and more efficient use if they are approached sensibly by both sides. In my practice I aim to facilitate that, for employers and employees.

This article is not intended as legal advice. If you are an employee who has received a settlement agreement and wants to understand its implications, or you are an employer looking for guidance on how to draft such agreements, reach out to Hina Belitz and her team on the details below. We have been advising clients on settlement agreements for over 20 years. 

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