Settlement agreements are powerful tools for employers, but errors can create more risk instead of reducing it. Here are frequent pitfalls to avoid.
- Rushing the process
Imposing very short deadlines or pressuring an employee to sign can backfire. Allow a reasonable period for them to take advice. A calm, respectful process reduces the risk of claims and maintains goodwill.
2. Under‑valuing legal risk
Offering too little may encourage employees to reject the agreement and bring claims. Assess:
- The strength of potential unfair dismissal or discrimination claims
- The cost of a defended Tribunal, including management time
- Reputational issues and disruption
- Price the agreement in a way that genuinely reflects those risks.
3. Using generic templates
Copy‑and‑paste agreements can miss important issues such as share schemes, bonuses, variable pay or local practices. Tailor each settlement agreement to the role, contractual terms and specific dispute.
4. Ignoring tax and notice rules
Incorrect treatment of notice pay and termination payments can result in HMRC challenges. Ensure your payroll team understands post‑employment notice pay and that tax clauses are up to date.
5. Missing non‑financial terms
Failing to address references, internal announcements or restrictive covenants can undermine the value of the deal. Clear drafting around these issues often costs nothing but can be decisive for employees.
6. Poorly managed conversations
Settlement discussions should be conducted professionally, usually on a “without prejudice” and/or “protected conversation” basis. Avoid language that appears discriminatory or threatening; such behaviour may strip away legal protections.
Working closely with specialist settlement agreement solicitors at the planning stage can prevent these mistakes and support consistent, compliant practice across your organisation.
