Settlement Agreements – A Quick Guide for N.Z Employers
Settlement agreements are a common and effective tool for resolving employment relationship problems in New Zealand. When managed correctly, they provide certainty, finality and risk containment for employers. When mismanaged, however, they can unravel quickly and expose employers to enforcement action, penalties, and compliance orders.
What Is a Settlement Agreement?
A settlement agreement is a written agreement between an employer and an employee (or former employee) that records the agreed terms for resolving an employment relationship problem or dispute.
Settlement agreements are commonly used to:
Resolve personal grievance claims.
Finalise outcomes following a without prejudice discussion.
Record agreed exits from employment.
Conclude matters at, or following, mediation.
In most cases, employers seek a “full and final” settlement, meaning the employee agrees not to pursue any current or future legal claims arising from the employment relationship.
Employer Pro has a comprehensive Employer Toolkit available for managing ‘Employee Exits and Mediations’, including step-by-step guidelines for understanding employment settlement agreements, practical walk-throughs, legal commentary, practical employer-focused template letters and documents, a section 149 settlement agreement template and more.
Section 149 Settlement Agreements – The Gold Standard
The safest and most robust form of settlement agreement is one entered into under section 149 of the Employment Relations Act 2000.
A section 149 settlement:
Is certified by an MBIE mediator.
Requires the mediator to confirm the parties’ understanding; and
Is final and binding, except in very limited circumstances (e.g. duress or incapacity).
Once certified, a section 149 settlement cannot be re-opened, other than for enforcement, e.g. if one party breaches its obligations under the settlement agreement.
Employer takeaway: Where possible, employers should always prefer a mediator-certified settlement over a private deed of settlement, unless there are special considerations that warrant preference for a deed of settlement.
Deeds of Settlement – Higher Risk
Some employers elect to use a general deed of settlement (i.e. without mediator certification). While these are still legally enforceable contracts, they:
Do not carry statutory “final and binding” protection; and
Are more vulnerable to challenge (e.g. allegations of pressure or unfairness).
Deeds of settlement are generally higher risk and should be used cautiously.
Key Terms Employers Should Get Right
A well-drafted settlement agreement should clearly address:
What claims are being settled (current and potential).
How employment ends (resignation, redundancy, etc.).
Termination date and final duties.
Payment provisions, including:
Final pay.
Any tax-free compensation (e.g. s 123 injury to feelings).
Payment timeframes.
Confidentiality and non-disparagement obligations.
Return of company property.
Post-employment obligations, if applicable; and
A clear full and final settlement clause.
Ambiguity in any of these areas can lead to disputes after settlement and compliance action.
Common Employer Risks and Pitfalls
Settlement agreements frequently fail where employers:
Attempt to settle without a genuine employment relationship problem.
Rush employees into signing without adequate time or advice.
Draft overly narrow, or vague settlement clauses.
Fail to comply with agreed payment or confidentiality terms.
Non-compliance can expose employers to compliance orders and penalties, even after settlement.
Case Law Illustration –Breach of Settlement Terms
Pachell Industries Limited v Welten [2019] NZERA 412
A case lead by Employer Pro’s Director, Kent Duffy who successfully represented the employer. Pachell Industries and the employee entered into a mediator-certified Record of Settlement under section 149 of the Employment Relations Act 2000 on 14 December 2018 to resolve an employment dispute. The settlement included strict terms requiring confidentiality and a prohibition on disparaging remarks about the employer.
After the settlement, the employee returned to work to collect belongings and told colleagues he had been paid substantially more than expected, sharing details that enabled others to deduce the settlement outcome, and photos designed to tarnish the employer’s reputation. The Authority found these actions breached both the settlement’s confidentiality and non-disparagement terms.
The Authority held that:
The employee’s disclosures was a breach of the settlement agreement’s terms relating to confidentiality and non-disparagement.
A penalty was appropriate to reflect the deliberate and detrimental nature of his conduct.
A compliance order issued to require the employee to comply with the terms of settlement.
The employee was also required to contribute to the employer’s legal costs.
Employer Takeaway: Mediator-certified settlements should be taken seriously. Even actions like discussing terms with colleagues that undermine confidentiality or disparage an employer can amount to a breach of a settlement agreement and may attract penalty orders. Employers should clearly explain confidentiality and non-disparagement obligations to employees at the time of signing and monitor for compliance.
Tax and Payment Structuring Considerations
Employers must carefully distinguish between:
Taxable payments (e.g. wages, holiday pay).
Non-taxable compensation (e.g. injury to feelings under s 123(1)(c)(i)).
Incorrect tax treatment can expose employers to IRD scrutiny and liability.
Employer Takeaways
Settlement agreements are a powerful risk-management tool, but only when used properly.
Section 149 mediator-certified settlements provide the strongest protection.
Rushed, poorly drafted or non-compliant settlements can revive disputes.
Employers should ensure clarity and strict compliance with settlement terms.
When in doubt, mediation remains the safest pathway to resolution.
Compliance Warning
Settlement agreements are legally binding and must be managed carefully and complied with strictly. Employers should not assume that an agreement will automatically provide finality unless it is properly drafted, clearly understood, and fully honoured.
Failure to meet payment obligations, or to comply with confidentiality and non-disparagement terms, can result in compliance orders, penalties, and additional costs due to legal disputes.
To minimise risk, employers should prefer mediator-certified section 149 settlements, ensure employees understand their obligations at the time of signing, and closely monitor compliance after settlement. A poorly managed settlement can re-open disputes and undermine the very certainty the agreement is intended to achieve.
This article is provided for general information only and does not replace professional advice. Employers should seek advice specific to their circumstances from Employer Pro if in doubt on their matters involving settlement agreements, including drafting, settlement lodgement and certification, and enforcement action for breaches. Employer Pro has a range of employer focused resources and services available through our competitive Employer Protection Packages.
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