Home Business Settlement Agreements: Making Them Benefit Your Business

Settlement Agreements: Making Them Benefit Your Business

As an employer, there are positives to entering a settlement agreement with an employee. Essentially, it’s a clean way of ending a contract without needing to endure a long and difficult legal procedure. However, this doesn’t mean that it’s always the best option, with any settlement agreement there are some risks and there is a guide to creating a smooth procedure and making them benefit your business.

Alternatively known as a compromise agreement in the past, the main reason an employer chooses to enter a settlement agreement is so that the employee’s termination remains confidential, both parties are legally not allowed to speak of the reason that they parted ways. Speeding up the process is also another reason for entering the agreement, normally the legal procedure can be timely and if an employee is terminated due to misconduct or performance issues, rather than go through the full redundancy procedure, a settlement agreement is much quicker.

The Risk

If the company offers a settlement agreement too early and the employee wasn’t expecting it, the agreement will only guarantee that conversations are protected under a few circumstances. choosing the right time to offer it and giving a full explanation is key to lowering any risk.

The Amount Paid

All settlement agreements are different and have particular reasons for the dismissal. Depending on the circumstances of the termination, this will decide on what is offered to the employee. The key is to find a balance between what benefits the employee and employer, trying to low-ball the employee during the negotiation phase might cause offence and make the termination escalate into something worse. Depending on whether the employer is willing to let the case become public knowledge, they can offer a lower sum to employees with conduct or performance issues if they feel that there’s a strong case against the employee. Likely, if the employer presents the evidence correctly, the employee would potentially receive nothing if they tried to escalate the settlement.

Use a Professional

There is always a certain complexity to a settlement agreement and if the employer runs a small business, sometimes they can try to cut costs by drafting the agreement themselves. This isn’t a good idea as there always tends to be areas or loopholes missed out and the employee might be able to take advantage of the business. It’s also a good idea to use a professional as they can help advise on what settlement to offer. If an employer is unsure of the circumstances involved if they do decide to draft it themselves, having a third party read over it is a good idea.

The Legal Fees

Usually, the businesses goal is to get the employee to sign the agreement without any problems. For that reason, the employer will usually contribute towards the legal fees and employment lawyers to speed up the process. In certain scenarios, the employer may not offer any support, in some agreements offering financial aid to the employee can be seen as a sign of guilt or trying to speed up the process. In turn, the employee can see this as the company is wrong and the employee might try and fight a stronger case. In some businesses, there might be access to a union representative, they can help guide the employee through the legal process with costing the business extra. Although they’re not professionals in law, they can help break down legal terms and make the whole situation more understandable.

See it From an Employee’s Side

As an employee, it can be a scary scenario to be involved in. a lot of people don’t know what a settlement agreement is, so taking the time to explain the situation and options will hopefully reduce their stress and confusion levels. This benefits the later stages because naturally, people decline options they don’t understand. Carefully mentioning that the compensation is for adhering to a specific set of rules and losing their employment rights will help them make a confident decision. Also, outlining the effects of not signing the agreement can help make their choice, facing redundancy proceedings or a disciplinary hearing can be even more daunting.

Refusing to Sign

Sometimes the employee can refuse to sign the final agreement, either the compensation is too low or they find the small print too onerous. At this point, they risk losing any compensation offered, the employer needs to persuade the employee to sign the contract even if it means bending to their will slightly. It all depends on the dismissal reasons, if the employer doesn’t try to negotiate it could lead to them employee trying to escalate the termination negatively, they could put in a grievance or discrimination complaint which reflects badly on the company if it becomes public knowledge, even if it’s proven inaccurate. If the employer is in the driving seat and has the truth on their side, reinforcing the case and making the employee aware they could lose everything is advised.

Termination Negotiations

At a point in the meeting, it can be agreed that there are protected conversations when the employer or employee can speak freely and privately about certain points without the conversation ever being used against their party. However, not all conversations can be protected, the introduction of new laws means that if any party behaves unfairly in the meeting or divulges inappropriate and unlawful information, the conversation can be used. It would need to stand up in court, bringing up information just to spite the other party will be ignored, but conversations regarding maternity discrimination, whistleblowing and unfair dismissal, for example, can be noted if they offer legal relevance.


  • Offers a simpler and more dignified end to an employee’s career with the company
  • For both parties, it reduces time, stress and costs involved in a long tribunal claim
  • Provides employees with a reference for their employment in the future
  • Fair compensation


  • Depending on the reason for dismissal paying a financial sum that may have never been required.
  • The employee can use the conversation against the company in a tribunal if it isn’t settled
  • There is risk of escalation into the wider workplace and it might affect the morale of other employees.

To summarize, the business should weigh up the pros and cons for the dismissal of the employee in question, don’t try to take advantage as it usually ends up escalating. But knowing if you have the stronger case to make sure the employee doesn’t take advantage of the company. Try to make both parties walk away happy and know a fair decision has been finalised.

Bio: Richard Meadow is a writer that works on topics in relation to employment, business operations and maternity discrimination solicitors. He is always interested in new subjects and articles to read about and enjoys writing about them.