Advice on negotiating a settlement agreement

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Employing people certainly has its ups and downs, with negotiating a settlement agreement being one of the most stressful processes for employers. Fortunately, I am here to offer some advice…

Settlement agreements should be treated as a last resort when a working a relationship with a member of staff completely breaks down. If there is no reasonable avenue left open to you, such as mediation, then a settlement agreement can bring the matter to a clean conclusion.

What are the benefits of a settlement agreement?

In the eyes of the law, a settlement agreement is a voluntary, legally binding contract that resolves a dispute or employment relationship. Coming to verbal or non-legal agreements is fraught with danger, as it leaves the door open for further issues to appear.

By agreeing to a settlement agreement, the employee normally accepts a payment from the company, and waives their right to any future financial claim. However, arriving at a point of mutual satisfaction is not always easy and requires plenty of thought and planning.

Making the first offer

The settlement agreement process should not be started lightly. Consider the potential consequences of coming to a financial deal. For example, could it damage employee relations in your company, or could it lead to claims from other staff members?

Once your business has exhausted all the alternatives, you need to kick off negotiations by making the initial offer. It is traditional for the employer to propose the terms of a settlement agreement, so you need to clearly state your position in writing giving the reasons for settling and your offer.

How do I make a financial offer?

When it comes to calculating a figure for the financial offer, you need to look at the potential costs of sorting the problem without a settlement agreement. What is the financial impact of retaining the employee or terminating their contract? Add up the remaining pay due, notice period, unspent annual leave and length of service.

The wider consequences of any settlement also deserve some consideration. For example, indirect costs include how the employee’s departure might affect your business and the process of recruiting a replacement.

Finally, your offer might include a reference for the employee. This displays an element of good will on your part and will help the employee find a new position, reducing the impact on their career.

Should you take legal advice?

Very few business owners have the confidence to enter into negotiations without consulting an HR or legal professional. I advise my clients to make an attractive settlement offer to reduce the risk of further financial claims. The aim should be to come to an arrangement which produces a satisfactory outcome for both the employee and the business.

Personally, I would always recommend following the Acas-approved negotiation process, as if a settlement cannot be reached you will need to go to an employment tribunal.

Here are the basic steps in the Acas process:

  • Allow the employee to consider your offer: usually at least 10 days.
  • Employee meeting: arrange a convenient time to discuss the offer. Whilst not a legal requirement, employers should allow employees to be accompanied at the meeting by a work colleague, trade union official or trade union representative.
  • The negotiation: expect a counteroffer, so be ready with facts and figures highlighting the fairness of your offer. Go away and consider any new points presented by the employee.
  • The details: draw up the payment arrangements, timings and wording of any announcements (e.g. ‘by mutual agreement’).

Need advice?

Reaching a settlement agreement is never a simple process, so businesses should seek professional advice. JT HRConsultancy is an established HR services company based in Bedfordshire with clients across the UK. If you need help of advice on an employment issue, please contact me.

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