Settlement agreements are useful tools to settle disputes quickly and bring a welcome finality to an often-uncomfortable situation for HR teams. Settlement agreement negotiations can be complicated, and when organisations are considering whether to settle a dispute in this way, plenty of questions arise.
Claire Rosney, Senior Employment Lawyer at Vista discusses some important points to consider before settling a case. If you would prefer to watch this blog as a video, you can do that here.
1. It can be beneficial to pay more to an outgoing employee than their claims might be worth
Particularly if the person staying within the business may cause a level of disruption. The cost to the business of dealing with that disruption would likely outweigh the higher payment required to remove them from the business quickly.
The other factor to consider here is how quickly an organisation wants to fill their vacancy, and who they want to fill it with. This can often be important to a business, and time is usually of the essence so paying more to get the right person in to the role and the other employee out of the role, is money well spent.
2. Employers have to pay for the employee to take legal advice
One of the requirements to enter into a binding settlement agreement is that the employee needs to take independent legal advice. Due to this requirement and because it’s in their interests, more often than not the employer will offer to contribute to or pay for that advice.
If an organisation is unsure how much to pay there are standard tariffs, in our experience most employers pay somewhere within the region of £250-£500. If it’s a senior level employee, then there could be other considerations such as Share Save Schemes or long-term incentive plans (LTIPs) which might cause the fees to rise. If this is the case, employers can be reasonable and agree something in advance, and if the employee wishes to go over and above this agreement they can support any shortfalls independently.
3. If you’re giving a reference – stick to the facts
In some situations, an employer might want to consider agreeing a reference with the employee. This can be a sensitive subject if the employee is leaving under dubious circumstances. The standard reference rules apply here; employers can’t be untruthful or misleading i.e. don’t sing their praises if the reason why you are parting company demonstrates the opposite.
If a reference request does come up, approach it factually. Limit the reference to name, job title, dates of employment and a brief description of duties and responsibilities. A nice touch is to always say that you wish them well for the future.
4. Avoid overly favourable references – they could be misleading
If this happens, the employer could be guilty of negligent misstatement. Think about the new employer, they are likely relying on a reference amongst other things before offering the job. If this reference is misleading i.e. states that the employee is ‘reliable and trustworthy’ when the reason for dismissal was embezzlement, and the new employer offers them the job on the basis of this misleading recommendation, then the new employer could sue for any losses arising out of this negligent misstatement. Stick to a factual recommendation and you can’t go wrong.
5. Confidentiality agreements may not be all they seem
When involved in a settlement agreement, many employers understandably insist on a confidentiality agreement being put in to place. This agreement relates to the fact of the settlement itself, the terms and the amount.
A word of caution when dealing with confidentiality agreements – sometimes they are not as robust as an organisation might think.
If an employee breaches the confidentiality agreement, it doesn’t necessarily mean that the employer can seek payment of the full settlement monies. The reality is – employers haven’t paid all of that settlement figure for the confidentiality agreement alone.
If confidentiality is of the upmost importance, it’s advisable to allocate part of the compensation payment and attribute it directly to confidentiality (remembering that this will need to be taxed). If the employee does then breach the agreement, they can then sue for the amount paid for confidentiality.
However, in this situation, employers have a tight balance to strike between making it worth the employees while not to breach the confidentiality agreement and lose the money and keeping the compromised amount reasonable.
There are plenty of reasons why an employer might find themselves considering entering a binding employment settlement agreement with an employee, and there are many benefits of doing so. If you are thinking about entering in to a settlement agreement with an employee and wondering how much money you should offer, we answer that question in another post.