Five things you should know before you make a settlement agreement offer

what employers need know about settlement agreements

About to make a settlement agreement offer? Read this first. From who’s going to lead the discussion to what the terms should be, Janette Lucas, Partner at Squire Patton Boggs (UK) LLP, outlines the essential settlement agreement checklist.

employers settlement agreement need know
Janette Lucas, Partner at Squire Patton Boggs.

There comes a time in every HR professional’s life (perhaps it feels like nearly daily) when you are asked for help with a settlement agreement. While there could be any number of questions which come to mind (“Another one?”; “Why, oh why, did I pick up the phone…?”), I will keep things simple with the who, why, what, when and how.

Who?

There are two “who’s” to think about here. Firstly, the employee you will be offering the settlement agreement to; secondly, the manager who will be making that offer. In relation to the employee, be sure to do your due diligence. Have you got a copy of their current contract and details of their current package? Are they a director and/or a shareholder and if so, what additional rights/obligations do they have as a result? How long has the employee been with you? Is it something the employee might have hinted they wanted or is this going to come as a complete surprise?

Which brings us to the second who – who is going to lead that discussion? Usually you would expect that to be their manager but this might not always be the right approach, for example if the relationship between him/her and the employee has become particularly strained.

What do you know about the employee’s personality and how they might react to a settlement offer being made? Are they likely to be angry? Or emotional? Whatever it is, think about who in management the employee knows or perhaps gets along with best, or is simply the most likely to be empathetic and therefore effective at delivering the message and getting the deal done.

Why?

It is important that you understand clearly why a settlement agreement is the suggested way to go.

I am going to cheat a bit here and sneak in an extra question. At this point, it is always worth asking yourself (even if not out loud) whether you should be making a settlement offer at all? For example, is the manager looking for an easy way out when he/she should really be starting a performance management process? Do you have the full picture or could the manager be holding something back?

Have they ever raised any complaints of any kind which might make this a discrimination or whistleblowing problem? Is there anything else that could potentially make this an exit a higher risk (and so more costly) strategy? Are there things you could do to help mitigate the potential risk/cost to the business if you waited another couple of weeks before putting a settlement offer forward? The answer could well be no to all of the above, but it is often worth pausing to reflect (however briefly) before diving in. Forewarned is forearmed.

What?

What will the terms of your settlement offer be? As the employee is waiving claims against the company, they will expect to be incentivised to do that. That incentive could be cash, a tax efficient payment (though remember that the tax “simplification” changes coming in next April will make this harder in some cases), additional benefits (e.g. outplacement), or even the chance to agree the way in which their departure is communicated. Much depends on the extent of any legal risk, how quickly you think that employee will get another job and what you think is likely to be most important to them.

At the same time, be clear about how far the company is willing to go and pitch your opening offer appropriately. You should always expect a negotiation, not least because the employee’s lawyer will want, if possible, to be seen to have won something for their client to justify the bill!

Remember also any protections the company needs.  Appropriate clauses dealing with the return of company property, confidentiality, non-bad mouthing, restrictive covenants, etc., should be included in most settlement agreements.

When?

When and where you hold settlement agreements discussions matters. You need to ensure discretion so that the employee can have the most dignified exit possible. This is key in setting the tone for the entire negotiation.

Timing can be important too.  Just because someone is going on holiday does not necessarily mean you should delay the conversation.  Depending on the circumstances, the longer the delay, the more stressful it becomes for the employee, particularly if they know something is afoot.  In other cases, for example, where you are dealing with an employee who may be sponsored or on a particular work permit or visa, make sure you understand what your obligations are in relation to the employee and/or in terms of any sponsor/work permit notifications once they are told of the proposed settlement and/or their termination.

How?

A plan isn’t a plan without a contingency and this is just as important when handling settlement agreement conversations. In many cases, after a bit of haggling and some tweaks to the drafting, a deal is done. But agree with the business what happens if you cannot reach an agreement and how long you will give it before calling time on the negotiation and reverting to Plan B.

Either you will need to start a formal internal process – whether that be performance management, redundancy, disciplinary or otherwise – or you may decide to bite the bullet and formally but probably unfairly terminate the employee’s employment anyway.  And remember, the fact that you didn’t reach agreement at your first attempt does not necessarily mean the door is closed.  A little bit of pressure could well mean the employee decides a settlement is their preferred option after all!

Visit our Settlement Agreements Hub more related articles.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.