Settlement Agreements: What They Buy

A settlement agreement buys certainty, and certainty is the only thing it buys. It does not make an unfair process fair, it does not fix a file, and it does not stop the person talking about what happened unless it says so and that term is capable of being enforced where you are.

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Organisations reach for one at the point a process has become difficult, which is usually the right moment and sometimes an expensive one. What it costs depends almost entirely on how strong the position was before anybody suggested it.

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What has to be true for one to work

The conditions differ by jurisdiction and usually include some combination of: the agreement being in writing, relating to particular claims, the person having taken independent advice from somebody qualified, and that adviser being identified in the agreement.

Get any of these wrong and the agreement may not do what it was for, which is the one outcome that makes the whole exercise pointless. What is required where you operate is a question for somebody qualified in the place concerned, and it is worth establishing once rather than per agreement.

What the money is for

Breaking it down matters, because different elements may be treated differently for tax and because an undifferentiated lump sum is harder to explain later.

• Contractual entitlements: notice, accrued leave, outstanding pay.
• Any statutory or contractual termination payment that applies.
• The compensation element, which is what is actually being settled.
• Anything agreed separately: a contribution to the person's legal advice, an outplacement provision, retained equipment.

How each is taxed differs and getting it wrong creates a liability that can land on either side. That, too, is a question for somebody qualified.

Terms that cause trouble afterwards

The agreed reference, which should be attached as a schedule rather than described. A reference "in the usual terms" is not a term; a reference set out in full, with a statement that the organisation will not depart from it, is.

The confidentiality clause, which needs carve-outs — for taking advice, for telling an immediate family member, and for anything the person is entitled or obliged to disclose to a regulator or authority. A clause purporting to prevent protected disclosures is a serious problem and in some systems is simply void.

The non-derogatory clause, which should be mutual. An organisation that requires the person not to criticise it, while reserving its own position, has drafted something that is both unattractive and often unenforceable.

Who proposes it, and how

The conversation itself may be protected in some systems and not in others, and the protection usually has conditions attached. Raising settlement in the wrong way can hand the person material rather than closing the matter.

That means the approach is not something to improvise in a meeting. What can be said, when, and on what basis is a question for somebody qualified in the place concerned, and it should be asked before the conversation rather than after it.

Time to consider

The person needs a reasonable period to take advice and decide, and pressuring somebody to sign by Friday is the thing most likely to undo the agreement or produce a complaint about how it was obtained.

Set a sensible deadline, say it is extendable for a reason, and mean it. The cost of two extra weeks is nothing; the cost of an agreement signed under pressure is the agreement.

Being realistic about what it costs

Settlement is usually proposed because a process has become difficult, and the cost reflects the position at that moment rather than the merits of anything. An organisation with a sound file and a proper process pays less, and an organisation with neither pays for both.

That is worth stating internally, because the figure is frequently treated as an unavoidable cost of the departure rather than as the price of the record. Counted across a year, the difference between the two is a reasonable estimate of what the work described elsewhere on this site is worth.

Performing it afterwards

The organisation has to do what it agreed: pay on the date, give the agreed reference in the agreed terms, return what was promised, and not depart from any of it.

This fails more often than it should, usually because the people performing the agreement are not the people who negotiated it. The practical fix is to extract every obligation into the departure checklist, with dates and named owners, on the day the agreement is signed — otherwise the thing that was bought at considerable cost is undone by somebody in payroll who never saw it.