When To Offer Settlement Agreements and What To Cover


Terminating an employee means disrupting their livelihood, something that most people don’t take too lightly. Having said that, there are times when the work is simply not getting done, or the employer-employee relationship breaks down to such an extent that it’s not in anyone’s best interest for employment to continue.

If an employee must be dismissed, a settlement agreement may be a valuable way to add structure and certainty to the process. It can also dissuade the employee from potentially seeking legal recourse. A settlement can be less costly and distracting than dealing with a lawsuit, plus it keeps the situation private between the company and the employee, which helps maintain both parties’ reputations.

To be clear, a settlement agreement is a mutually-agreeable contract between a company and an employee that outlines the terms of the employee’s dismissal.

The terms of a settlement can vary, depending on what the company is willing and able to provide and the strength of the employee’s case. In addition to the employee’s remaining consistent pay, a settlement agreement can also include:

  • Severance pay
  • Continuation of benefits
  • Leave reimbursement
  • Payment in lieu of notice
  • Employment assistance
  • Moving costs
  • Other benefits (extend stock options, 401k benefits, etc.)

A settlement agreement may be needed in an instance when the company wishes to avoid a long, drawn-out process before terminating an employee. Depending on the circumstances, the employer may decide to offer an agreement in order to speed up the process. Eric Gordon also notes that another reason to use a settlement agreement is if the trust and confidence between the company and the employee have deteriorated. He also suggests to ask an attorney if there are further questions.

While a settlement agreement helps ease the employee’s transition out of his/her position, it also protects the company. It’s on the employee to agree to certain conditions, which could include the following:

  • To release any and all claims, present and future, against the company.
  • To not make disparaging remarks about the company or its employees.
  • To abide by a confidentiality agreement.
  • To not solicit any of the company’s employees, vendors, or customers.

Settlement agreements are meant to protect both the company and the employee’s best interests. The more informed everyone is about dismissal procedures, the easier and better the process will be.


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