For employers, settlement agreements can be useful where there is a genuine desire to achieve certainty, manage risk and avoid a lengthy formal process or Employment Tribunal claim.
For employees, settlement agreements can be useful to provide certainty on what will happen next, how much they will be paid, when their employment will end, guarantee a reference will be provided and in some cases, control how their exit is communicated internally and externally.
However, they are not appropriate in every situation. Employers should consider carefully why an agreement is being proposed, how discussions will be handled and what terms will be needed to protect the business.
Handling settlement agreement discussions incorrectly can present a risk of a claim in the Employment Tribunal.
What is a settlement agreement?
A settlement agreement is a legally binding written agreement between an employer and an employee or worker.
Typically, the employer provides an agreed financial payment or other benefits in return for the individual agreeing not to pursue specified legal claims.
Settlement agreements can also deal with matters such as:
- The employee’s leaving date
- Notice and holiday pay
- Bonus or commission
- An agreed reference
- Confidentiality
- Restrictive covenants
- Return of company property
- Internal and external announcements.
For a settlement agreement to validly waive relevant employment claims, specific legal requirements must be met, including the individual receiving independent legal advice.
When might an employer consider a settlement agreement?
Settlement agreements can be used in a wide range of situations.
Where the employment relationship has broken down
Sometimes the relationship between an employer and employee becomes difficult even though there may not be one clear incident justifying dismissal.
If trust has deteriorated and both sides recognise that continuing the relationship may not be workable, a settlement agreement can provide an agreed route to exit.
During a performance management process
An employer dealing with persistent underperformance may decide to explore settlement alongside a formal performance management process.
This can allow both sides to consider whether an agreed departure would be preferable to continuing through a lengthy capability procedure.
Employers should not assume that offering settlement removes the need to follow a fair process if no agreement is reached.
Following a grievance or workplace dispute
Where an employee has raised a grievance, discrimination complaint or other workplace concern, settlement discussions may help resolve the dispute without further escalation.
Particular care is needed in these situations, however, because not all settlement discussions are automatically protected from being referred to in later proceedings.
During redundancy or restructuring
Settlement agreements are sometimes used as part of a redundancy exercise, particularly where an employer is offering enhanced termination terms.
They can provide certainty over the employee’s departure and reduce the risk of later claims.
Employers should still ensure that any required redundancy consultation and selection process is handled appropriately.
When a senior employee or director leaves
Settlement agreements are particularly common in senior exits.
A senior employee may have significant notice rights, bonus arrangements, share interests, access to confidential information or restrictive covenants.
A settlement agreement can provide a clear framework for dealing with these issues and help both sides agree how the departure will be communicated.
What is a protected conversation?
Section 111A of the Employment Rights Act 1996 allows employers and employees to have certain confidential discussions about ending employment on agreed terms.
These discussions are often referred to as protected conversations.
Where the protection applies, the discussions usually cannot be relied upon as evidence in an ordinary unfair dismissal claim. However, the protection is not absolute and does not apply to every type of claim. It can also be lost where there has been improper behaviour.
Employers should therefore avoid placing undue pressure on an employee or presenting dismissal as inevitable if they refuse the offer.
Is a settlement agreement voluntary?
Yes.
An employee does not have to accept a settlement agreement and is free to negotiate or reject the terms offered. Acas guidance makes clear that employers should explain that the process is voluntary and that settlement discussions should not improperly affect any ongoing disciplinary or performance process.
Employers should also allow the employee reasonable time to consider the proposed agreement and obtain independent advice.
How much should an employer offer?
There is no fixed amount that must be offered under a settlement agreement.
The appropriate figure will depend on factors such as:
- Salary
- Notice entitlement
- Length of service
- Potential legal claims
- The strength of the employer’s position
- The cost and time involved in continuing a formal process
- The employee’s willingness to reach agreement.
Employers should distinguish between payments the employee is already entitled to, such as salary, holiday pay and notice pay, and any additional compensation offered in return for settlement.
What should confidentiality clauses cover?
Settlement agreements often contain confidentiality provisions, but they should be drafted carefully.
They may cover the terms of the agreement, confidential business information or how the departure is communicated.
However, confidentiality clauses cannot lawfully prevent certain disclosures, including protected whistleblowing or reporting a crime. Employers should ensure that the wording makes these limits clear.
What if the employee rejects the agreement?
If settlement cannot be reached, the employer should consider what process would otherwise have been followed.
This might involve performance management, disciplinary action, grievance procedures or redundancy consultation.
Employers should avoid treating an employee unfavourably simply because they rejected a settlement offer.
Using settlement agreements effectively
Settlement agreements can provide a practical way to resolve workplace disputes and manage employment exits, but they need to be approached carefully.
The strongest agreements are based on a clear understanding of the legal risks, sensible negotiation and properly drafted terms that protect both the business and the individual.
DTM Legal’s Employment & HR team advises employers on settlement agreements, protected conversations and negotiated exits, including performance, grievance, redundancy and senior employee situations.
If you are considering offering a settlement agreement to an employee, contact DTM Legal’s Employment & HR team to discuss the appropriate approach and terms.