Settlement Agreements: use them when employees are leaving to minimise employer liability

Settlement Agreements are legally binding contracts ending an employment contract and settling employee claims. They should also reduce the risk of an expensive and time-consuming Employment Tribunal claim. Always get the employee to sign a settlement agreement so the employee waives (gives up) any employment claims against the employer. This is especially vital if the employer pays the employee compensation at the same time when he/she leaves.

Have you a difficult staff or employee issue to resolve? 

Have you considered starting a Pre-Termination Negotiation. This is a conversation by face to face meeting and/or by emails etc which cannot be referred to by an employee in an Employment Tribunal or Court. It allows the employer since 2013 to propose a settlement offer and send an employee a settlement agreement for the employee to consider.

What is a Settlement Agreement?

Settlement Agreements are a very useful method of ending an employment relationship which is no longer working, or to settle a workplace dispute.
They are legally binding and voluntary. Their terms are agreed mutually through negotiation, and the employee has the right to independent legal advice before signing the settlement agreement. The employer usually contributes between £350 and £500 plus VAT towards the employee’s legal fees.
A financial payment is made to the employee who – upon acceptance and signature of the settlement agreement – in return waives the right to bring a claim to an Employment Tribunal or Court.
The negotiations and the settlement agreement cannot be referred to in an Employment Tribunal or Court if an agreement is not reached, so they remain confidential.  If an employee rejects a Settlement Agreement, the employer can pursue other procedures for example Disciplinary Procedures if the employee is not performing.
The Settlement Agreement has replaced compromise agreements ( and forms part of the new employment legislation introduced in July 2013 to help employers settle disputes more efficiently.  It is vitally important that experienced HR solicitors are consulted to structure the settlement offer and the settlement agreement properly and within the new law.
Used effectively, Settlement Agreements can provide compensation and usually a reference to an employee, while avoiding the time, cost and stress to both the employee and the employer fighting out the issue in public in an Employment Tribunal.  An employee can leave with dignity and the workforce can be spared the damage to employment relations brought about by a poorly managed termination of employment.
The steps to making a successful Settlement Agreement need to be implemented with care to avoid the legal pitfalls of mishandling the negotiation, or not following the ACAS Code about Settlement Agreements see

What are pre-termination negotiations? How do pre-termination negotiations work? 

Possible steps in a pre-termination negotiation
Following the guidelines set out in the Acas Code of Practice on Settlement Agreements, an approach under the new regime could proceed like this:
Step 1. The employer approaches the employee to explain that:

It is concerned about the employee’s performance, giving some idea of the performance issues.

There are two options:

  1. a performance procedure (the employer should outline the steps of the procedure); or
  2. an exploration of whether they can agree on an exit on the basis of a settlement package.

Step 2. If the employee agrees to explore the suggestion of settlement, the employer puts forward formal written terms.
Step 3. The employee must have a “reasonable period” in which to consider the formal written terms. The ACAS Code suggests a 10 day period is reasonable.
Step 4. If the employee is interested in proceeding with the settlement, the employer can provide the employee with a “Settlement Agreement” (the new name since 2013 for compromise agreements) documenting the terms. The employee will need to take independent legal advice on the implications of entering into the agreement.
Step 5. If the employee is not interested in exploring settlement, the employer should back off immediately and start a proper performance procedure.
Step 6. Unless there is improper behaviour, conversations about the settlement agreement cannot be used as evidence in an ordinary unfair dismissal claim at an Employment Tribunal.
Other situations where initiating a pre-termination negotiation may be useful include: potential disciplinary for misconduct and redundancy situations; and where the employee is not happy in his or her role.
Notably, it is equally open to the employee to approach the employer to initiate a pre-termination negotiation as well.
If you need more information and to speak to me or one of our experienced HR Solicitors please call us on 0203 755 5288


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This article explains the main legal issues and common situations to consider. It is not a substitute for legal advice. Please get in contact to discuss your particular issue or queries.