Settlement agreements have been around for a couple of years now, since the compromise agreement was renamed and a new legal structure was introduced in 2013, to allow employers and employees to have "protected conversations" about an employee's possible departure from the business.

A survey carried out by online HR resource, XpertHR, has found that most employers have, at some time in the past year, used settlement agreements with departing employees. A small minority of employers use them on a routine basis.

The survey involved 471 employers and found that 83% of employers had used a settlement agreement that year. 13% said they use them as routine when someone leaves. On average, employers signed around three settlement agreements every year.

The likelihood is that larger organisations will use them more than smaller ones, that is a logical conclusion to make, but employees at large organisations were also found to be more likely to suggest a settlement agreement (around 51% of large employers reported that employees had asked for a settlement agreement). However, around 33% of all employers, large and small had experienced employees approaching them for a settlement, rather than the other way round.

Protected conversations

Part of the new legal structure for handling employees' departure from businesses is that employers are now entitled to have what is known as a "protected conversation", (or a pre-termination negotiation) with an employee they would like to remove from the business. The term "pre-termination negotiations" means "any offer made or discussions held, before the termination of the employment in question, with a view to it being terminated on terms agreed between the employer and the employee".

The rules on this process are relatively complex and employers are advised to seek expert advice before embarking on any discussion with an employee. The process was designed to remove the need for there to be a pre-existing dispute between the employer and the employee before the parties could have an off-the-record chat about the employee's future at the business.

Whilst there is no need for there to be a dispute in place already, this process cannot be used for anything involving any kind of discrimination issues or for any other improper purpose.

Essentially, only straightforward unfair dismissal scenarios will be covered, for example where someone is being dismissed without process for genuine conduct or capability reasons. Any case involving automatic unfair dismissal will also not be covered. This means that the fact and content of pre-termination discussions may be referred to in automatically unfair dismissal cases as well as all other types of case such as discrimination, unlawful detriment, and breach of contract (including wrongful dismissal) unless they are covered by the "without prejudice" rule. The without prejudice rule requires there to be a pre-existing dispute before an employer can initiate a discussion about settlement.

The introduction of "protected conversations" or "pre-termination negotiations" has had absolutely no effect on 58% of employers questioned and they confirmed that they have not changed anything since this avenue was introduced. However, a significant minority (40%) agreed that it had made it easier for them to have difficult conversations with employees.

Common reasons for using a settlement agreement

70% of respondents to the survey stated that settlement agreements were generally used where there has been a breakdown in professional relationships between staff.

Just over 25% of employers questioned felt that the introduction of tribunal fees means there is now less need for settlement agreements, but nearly 50% disagreed and said that this is not the case: settlement agreements are still needed.

The survey also discovered that a huge 93% of agreements contain a confidentiality clause (one might question why the other 7% do not!), 87% contain an agreed reference, and 68% contain clauses relating to the making of derogatory statements.

Certainly, in our experience, these clauses are generally included (although if a reference is included at all it is generally a standard one containing only dates of employment and job title) and are required to protect both parties.