Avoiding Common Pitfalls in Settlement Agreements: A Guide for Employers and Employees

Settlement agreements are a valuable tool for resolving workplace disputes and ending employment relationships on agreed terms. However, both employers and employees can make critical errors when drafting or negotiating these agreements. These mistakes can lead to unnecessary complications, increased legal costs, and even future disputes.

From legal compliance issues to procedural oversights, this article outlines the most common mistakes in settlement agreements and offers practical tips to help you avoid them.

Legal Requirements and Compliance

Not meeting statutory requirements: A settlement agreement must be in writing and meet specific legal criteria to be legally binding.

Tip: Always use a settlement agreement that has been drafted or reviewed by an experienced employment solicitor to ensure compliance with all relevant legislation, including the Employment Rights Act 1996.

Misunderstanding the tax treatment of settlement payments: Certain payments, such as payments in lieu of notice (PILON) and accrued but untaken holiday, are subject to income tax and National Insurance. However, ex gratia payments of up to £30,000 may be tax-free.

Tip: Seek advice from a legal or tax professional and refer to HMRC guidance to fully understand how each part of the settlement will be taxed.

Drafting Issues

Using vague or broad confidentiality and restrictive covenant clauses: Including broad or unenforceable clauses can face the risk of being challenged later.

Tip: Ensure these clauses are clearly worded and proportionate, protecting legitimate business interests without being unnecessarily restrictive.

Not clearly defining the scope of claims the employee is waiving: Failure to do so can leave the door open to future claims.

Tip: List all specific claims being waived, referencing relevant legislation such as the Equality Act 2010 or the Employment Rights Act 1996.

Errors in financial calculations or descriptions: Misstatements around compensation or redundancy payments can result in disputes or breach of contract claims.

Tip: Double-check figures, use government tools such as the Statutory Redundancy Calculator, and break down payments clearly in the agreement.

Negotiation Pitfalls

Ignoring employee concerns: This may lead to the agreement being rejected or the employee/employer relationship deteriorating further.

Tip: Hold open, without prejudice conversations to understand the employee's priorities and facilitate a mutually acceptable outcome.

Promising or expecting unrealistic compensation: This can result in negotiations breaking down.

Tip: Employers should ensure offers are financially viable, and employees should base counter-proposals on reasonable and sensible rational.

Missing Key Provisions

Omitting repayment clauses: These are vital if one party breaches the agreement.

Tip: Include clear terms allowing recovery of payments if the agreement is breached.

Overlooking non-derogatory statement provisions: Verbal assurances are not legally binding, and reputational damage may follow.

Tip: Include mutual non-disparagement clauses to protect both parties from harmful public or private statements.

Procedural Mistakes

Not giving employees enough time to consider the agreement: This could render the agreement unenforceable.

Tip: Employers should allow at least 10 calendar days for employees to seek independent legal advice, as per Acas guidelines.

Failing to follow internal policies or collective agreements: This can lead to inconsistency and legal risk.

Tip: Employers must review internal procedures and agreements before initiating settlement discussions.

Employees missing proposal deadlines: Initial offer letters often come with expiry dates.

Tip: Employees should respond within the stated timeframe to avoid missing out on the opportunity to settle.

Post-Agreement Oversights

Delayed payments or failure to comply with the agreed terms: This can result in breach of contract claims.

Tip: Set internal reminders to fulfil all terms promptly and accurately. Failure to do so may lead to enforcement action or damage to business reputation.

Conclusion: Get It Right the First Time

Avoiding these common settlement agreement mistakes ensures a smoother, more effective resolution for employers and employees. A well-drafted agreement not only brings closure but also reduces the risk of future legal issues.

Because settlement agreements involve complex legal, financial, and procedural considerations, it is strongly recommended to seek professional legal advice. An experienced employment solicitor will help ensure your agreement complies with the law, protects your interests, and stands up to scrutiny.

Speak to Our Employment Law Experts

If you're preparing or reviewing a settlement agreement, our Employment Litigation team at Warner Goodman LLP is here to help. We provide practical, tailored advice to ensure the best possible outcome for your situation.

• Call us today on 023 8063 9311
• Or email us at enquiries@warnergoodman.co.uk