References in a Settlement Agreement

When it comes to Settlement Agreements, outgoing employees often find it essential to secure a reference for their future job prospects.

In most industries, there’s no legal requirement for businesses to provide a reference to departing employees.

However, exceptions exist, especially in regulated sectors like banking, finance, or care.

In such cases, providing a reference is mandatory.

Yet, even in industries where it’s not required, the importance of negotiating an agreed form of reference within a Settlement Agreement should not be underestimated.

In this article, we explore the significance of including references in settlement agreements and offer insights on how to approach this crucial aspect.

Why Incorporate References in Settlement Agreements

While it’s customary for an agreed reference to be part of a settlement agreement, it’s a detail that is sometimes overlooked. What the reference includes can vary widely: some employers merely confirm dates of employment and job responsibilities, while others are open to providing more positive feedback about their former employees. The specifics of the reference will depend on the employer’s typical practice and the circumstances surrounding the employee’s departure.

The valuable aspect of a settlement agreement is that it allows for the negotiation of a reference, as there’s no inherent obligation on the part of the employer to provide one. If your settlement agreement doesn’t explicitly address references, it’s highly advisable to request that this be included.

To ensure that only the agreed reference is supplied, it’s prudent to include a clause specifying that requests for telephone references or questionnaires will be declined, and prospective employers will be informed that only a written reference will be issued. This safeguards against the possibility of an employer providing a negative or misleadingly positive reference over the phone or in a questionnaire.

Does an Employee Have the Right to a Reference?

In most cases, there is no legal requirement for employers to provide references for their employees or former employees unless the employer operates in a regulated industry such as finance and is subject to the Financial Services Authority’s rules. Consequently, an employer retains the right to refuse to provide a reference.

However, if an employer chooses to issue a reference, they must exercise reasonable care to ensure that the information is accurate, truthful, and impartial. It should not include defamatory statements or be composed maliciously or negligently, resulting in an excessively negative or falsely positive portrayal. Agreeing to provide a reference can be seen as a benefit for an employee within the framework of a settlement agreement.

Considerations for Employers When Refusing a Reference in the Agreement

For employers who do provide references to some employees, it’s essential to maintain consistency in their approach. Inconsistencies could lead to allegations of discrimination, victimization, breach of contract, or breach of trust and confidence.

Recent legal developments have broadened the scope of discrimination-related issues. Under the Equality Act 2010, an employer’s refusal to provide a reference, or providing a poor reference, could potentially result in unlawful discrimination.

However, the burden is on the employee to demonstrate that any discriminatory treatment is based on one of the protected characteristics. Even if this can be established, it is often too late to address the issue of a job offer being withdrawn for these reasons. As in many areas of life, a proactive approach is preferable to a reactive one.

Moreover, references, especially positive ones, can serve as an effective tool to encourage employees to engage in exit negotiations. This often leads to the formulation of a settlement agreement that includes a mutually agreed reference.

Incorporating a Reference into a Settlement Agreement

Employees who are invited to enter into a settlement agreement should not hesitate to request a reference. This is a common practice and usually, terms can be readily agreed upon.

In fact, it’s entirely feasible to negotiate an agreement stipulating that the employer will respond to any future reference inquiries in accordance with the pre-arranged format of the employment reference. This can greatly benefit the employee, and when handled with consideration regarding the nature and timing of the request, providing an agreed reference typically costs the employer nothing.

A well-drafted reference clause might specify, “A reference will be furnished upon written request in the format attached to this agreement at Annex A.” Subsequently, an agreed reference, labeled “Annex A,” is appended to the settlement agreement.

Some settlement agreements may simply state that a ‘standard reference’ will be furnished upon request. This implies a straightforward reference comprising basic details like job title and employment dates.

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