The use of Settlement Agreements is becoming more and more common, with the parties often seeing an agreed resolution of any employment-related issues as preferable to following drawn-out internal processes, or embarking on time consuming and costly litigation.
A Settlement Agreement is a legally binding document that sets out the terms for resolving a dispute—usually (but not always) involving an agreed termination of employment. In exchange for waiving their right to pursue legal claims, the employee typically receives a financial settlement or other benefits.
These agreements are commonly used to manage exits involving performance, conduct, or attendance issues, or where an enhanced redundancy package is being offered. They can also be used to agree changes to employment terms.
While the employer will generally have policies in place to address performance, conduct and absence issues, these can be time consuming. Used properly, using a Settlement Agreement can often mean a quicker resolution, and also gives the employer the certainty there will be no claims by the employee. From the employee’s perspective, an agreed exit may avoid a distressing internal process, and hopefully give the employee a financial payment which will allow them time to find another job.
Below, we consider some of the issues which can arise when preparing Settlement Agreements
Under the Employment Rights Act 1996 the following conditions must be met:
Employers in certain sectors should check and be aware of any applicable regulatory requirements. For example, public bodies in Scotland, including the NHS and colleges, must meet the expectations of the Scottish Funding Council.
For BTO’s registered social landlord clients (“RSLS”), the Scottish Housing Regulator has oversight over the use of Settlement Agreements (which are a “notifiable event”) and requires there to be a clear policy for their use. RSLs must ensure that appropriate consents are obtained from the management committee, and the requirements of any policy should be fully met. This may include a need to obtain a report from a solicitor, addressing whether the proposed settlement is reasonable in the circumstances. In general terms, the SHR’s expectation is that the employer will use its policies and procedures to deal with issues which arise and will not routinely look to resolve problems with a “pay-off” to an employee.
Charities proposing to enter into a Settlement Agreement should consider whether it is consistent with their charitable purposes. We regularly advise clients in these sectors on such issues .
One of the key mechanisms employers use in reaching settlement agreements is the protected conversation. Under section 111A of the Employment Rights Act, a protected conversation or “pre-termination negotiation” allows employers and employees to have off-the-record, confidential discussions about ending the employment relationship, without the risk of the conversation being used as evidence in an ordinary unfair dismissal claim. Note, however, that the discussion will be “on the record” for any other type of claim, so employers need to be comfortable that what they say may be repeated at an employment tribunal hearing.
Getting the protected conversation “right” is key and we regularly script these conversations for clients to ensure the proper process is followed and the employer is prepared to have the conversation and knows the steps in the prpcess to achieve the desired outcome.
The conversation must not take place under duress or place any pressure on the employee to accept a Settlement Agreement. The employer can do no more than present options for the employee to consider, and should set out what the alternatives are, usually that an internal process will be followed to address performance, conduct, redundancy etc. The message from the employer cannot be “you are going to lose your job”.
Protected conversations should be followed up with a letter to the employee, outlining what was discussed at the meeting and the proposed offer. Employees should be given a reasonable time to consider the proposal but this will not be “binding” until a Settlement Agreement is signed; this would usually be issued once the employee has indicated their agreement in principle.
Settlement agreements can be a useful tool for regulating employees’ post termination behaviour; however, employers should be alive to the fact that not everything can be regulated.
Settlement agreements typically include confidentiality clauses restricting disclosure of the agreement’s terms – or even its existence – though exceptions often apply (e.g. close family or prospective employers).
Settlement agreements can also state that employees will not make negative or derogatory statements about the business or its staff.
However, employers cannot attempt to completely silence the employee. Any clause seeking to prevent the employee making protected disclosures (whistleblowing) will be invalid. That applies equally to disclosures required by law, and making reports to the police.
With the implementation of the Employment Rights Bill on the horizon, it is proposed that employees cannot be barred from making disclosures about harassment or discrimination, or the employer’s response to it (see our earlier BLOG). If implemented, this may undermine the attractiveness of Settlement Agreements to employers – if they are settling a claim/allegation of discrimination, but cannot prevent the employee repeating these allegations, settlement may be less appealing, and more employers may decide not to settle with the employee.
Many employment contracts contain restrictive covenants restricting an employee’s activities after departure – such as non-compete, non-solicitation, or non-dealing clauses. Where the employer still wants to be able to rely on these clauses after the employment ends, the Settlement Agreement should make that clear. It is also permissible to add restrictive covenants in a Settlement Agreement where there are none in the employment contract. This is ultimately a matter of negotiation.
To be enforceable, restrictive covenants must protect a legitimate business interest—such as confidential information, trade secrets, or client relationships—and go no further than reasonably necessary in scope, duration, or geography. If the restrictions go too far, they will be unenforceable.
While well-structured settlement agreements can be powerful tools, they should be used with caution. Forward planning is required at the outset to understand the desired outcome, how it may be achieved, and what options are available. Advice should be taken on how to approach the “protected conversation”, what claims are to be settled, regulatory restrictions, and any need for confidentiality/restrictive covenants.
We advise clients in these matters regularly and we can assist you or your business and provide training to managers on handling such matters in your business. If you wish to have a chat about how we can assist please contact our Employment Team at Glasgow: 0141 673 2412 and Edinburgh: 0131 381 5041.
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