When workplace disputes arise, some employers mistakenly believe they can simply pull out a Settlement Agreement, offer some compensation, and make the problem disappear. If only it were that simple!

While Settlement Agreements can be useful tools for managing risk and resolving disputes, they are far from a one-size-fits-all solution. Misusing them can lead to unexpected complications, increased costs, and even greater legal exposure.

Let’s break down why Settlement Agreements should be handled with care and not relied upon as an automatic fix.

What is a Settlement Agreement?

A Settlement Agreement (formerly known as a compromise agreement) is a legally binding contract used to resolve employment disputes. Typically, an employee agrees to waive specific legal claims against the employer in exchange for a financial settlement or other agreed terms.

While they are often used to facilitate an amicable departure, they must be handled correctly—otherwise, they can create more problems than they solve.

Why a Settlement Agreement Isn’t Always the Answer

Employees Must Take Legal Advice

For a Settlement Agreement to be legally binding, the employee must seek advice from an independent solicitor. This process often brings unexpected consequences for employers:

• Employees may become aware of additional legal claims they hadn’t considered before.

• They are likely to negotiate better terms, increasing the cost for the employer.

• The solicitor may advise the employee against signing altogether, prolonging the dispute.

Employees Can Reject the Offer

Contrary to what some employers believe, a Settlement Agreement isn’t enforceable unless both parties willingly sign it. Employees cannot be forced into agreeing, and if undue pressure is applied, it could jeopardise the entire process. In fact, if discussions are not handled correctly, they could lose their ‘without prejudice’ status, making them admissible in an employment tribunal.

Rejection Can Have Lasting Consequences

If an employee refuses the Settlement Agreement, the fallout can be significant:

• They may feel targeted, leading to a breakdown in trust. 

• Grievances may be raised, creating further complications. 

• Productivity can drop, and the employee may take long-term sick leave. 

• They may eventually resign and claim constructive dismissal. 

Far from resolving an issue, a poorly executed Settlement Agreement can escalate it into a bigger problem.

So, What’s the Right Approach?

Settlement Agreements can be effective—but only when used correctly. Here’s how to do it right:

• Seek professional guidance: Consult an experienced HR or legal professional before proposing an agreement.

• Handle discussions delicately: Ensure conversations remain confidential and non-coercive.

• Consider alternative avenues: Mediation, performance management, or an open dialogue may be more effective than jumping straight to a legal agreement.

Want More Guidance?

A Settlement Agreement is a tool—not a cure-all. Employers who treat them as a quick fix risk making costly mistakes. Instead, taking a strategic, well-informed approach will ensure the best possible outcome for both parties.

Want expert guidance on Settlement Agreements? Get in touch with our excellent-rated advisors today or book a demo of our HR software, which allows you to offer settlements directly in our platform.