Settlement Agreements: Employer's Guide

Settlement agreements provide a clean break when employment ends. Used properly, they avoid litigation and give both parties certainty.

What Is a Settlement Agreement?

A settlement agreement is a legally binding contract where:

• The employee agrees to waive specified employment claims
• The employer typically makes a payment
• Both parties agree to other terms (reference, announcements)
• The employment relationship ends (or claims are settled)

Previously called: Compromise agreement (name changed in 2013).

When to Use Settlement Agreements

Common Scenarios

Situation	Why Settlement Agreement Helps
Redundancy	Clean exit, avoid consultation claims
Performance issues	Quicker than formal process
Relationship breakdown	Avoid prolonged conflict
Misconduct (not gross)	Alternative to dismissal
Mutual agreement	Document the terms
After grievance	Resolve without tribunal
Senior exits	Confidential, managed departure

When Not to Use

• Gross misconduct you want to dismiss summarily
• When you want to set a precedent
• If the employee won't engage
• If you can't afford a reasonable payment

Legal Requirements

For a Valid Settlement Agreement

The agreement must:

1. Be in writing
2. Relate to particular complaints (specify the claims being waived)
3. Employee must have received independent legal advice from:
   • Solicitor with current practising certificate
   • Certified trade union official
   • Advice centre worker authorised to give advice
4. The adviser must be identified in the agreement
5. The adviser must have insurance covering their advice
6. State that statutory conditions are satisfied

Without These Requirements

The agreement is not valid and the employee can still bring claims.

Structuring a Settlement Agreement

Key Sections

1. Parties Identify employer and employee correctly.

2. Background/Recitals Brief context (without admitting liability).

3. Termination Terms

• Last day of employment
• Pay during notice (or PILON)
• Outstanding holiday pay

4. Settlement Payment

• Amount
• Timing
• Tax treatment

5. Claims Being Settled List specific claims being waived.

6. Reference Agreed wording (usually attached).

7. Confidentiality What must be kept confidential.

8. Announcements Agreed internal/external statements.

9. Return of Property Company property, documents, etc.

10. Legal Advice Confirmation employee has received advice.

11. Entire Agreement This is the complete agreement.

12. Warranty of Non-Disclosure Employee hasn't told others about claims.

The Settlement Payment

Components

Tax-free (up to £30,000):

• Compensation for loss of employment
• Ex-gratia payment (not contractual)

Taxable:

• Notice pay (usually)
• Bonus payments
• Holiday pay
• Restrictive covenant payments

How Much to Offer

Consider:

• Potential claims: What could they bring? How strong?
• Tribunal awards: What might they win?
• Your costs: Legal fees, management time
• Their costs: How much to litigate?
• Length of service: Longer = more risk/expectation
• Circumstances: Who's "at fault"?
• Market practice: What's reasonable?

Rules of Thumb

Situation	Typical Range
Clean exit, no real claims	1-2 months' salary
Some risk of claims	2-4 months' salary
Strong claims	4-6+ months' salary
Senior employees	Usually higher

But every situation is different.

The Reference

Importance

For many employees, the reference matters as much as the payment.

Typical Approach

• Agree exact wording (attached to agreement)
• State you won't deviate from agreed wording
• Cover dates of employment, job title, sometimes more
• Any verbal enquiries met with same information

Sample Reference Wording

"[Name] was employed by [Company] from [date] to [date] in the role of [job title]. [He/She/They] reported to [title] and was responsible for [brief description].

[Name] left the company on [date] and we wish [him/her/them] well for the future."

Neutral, factual, not misleading.

Confidentiality

What's Usually Confidential

• The existence and terms of the agreement
• The circumstances leading to it
• The payment amount
• Any discussions during negotiation

Exceptions

• To legal/financial advisers
• As required by law
• For tax purposes
• To immediate family (sometimes)

Practical Limits

Complete secrecy is hard to enforce. Focus on what matters most.

The Negotiation Process

Initial Approach

Options:

• Formal "protected conversation"
• Informal discussion
• Written proposal

Protected conversations: Since 2013, settlement discussions are inadmissible in ordinary unfair dismissal claims. But not in discrimination or automatically unfair dismissal claims.

Making an Offer

Include:

• The payment proposed
• What you expect in return
• Deadline for response
• Offer to pay legal fees

Sample Opening:

"Without prejudice, we would like to discuss the possibility of your departure from the company on mutually agreed terms. We are prepared to offer [X] in exchange for a settlement agreement waiving claims..."

Negotiation

Expect some negotiation on:

• Payment amount
• Reference wording
• Announcement wording
• Tax treatment
• Leaving date

Deadline

Give reasonable time:

• At least 10 days typically
• More if complex
• But don't leave open indefinitely

Legal Costs Contribution

Standard Practice

Employer contributes towards employee's legal advice costs.

Typical Amounts

• £350-500 + VAT for straightforward agreements
• More for complex situations
• Make it clear what you'll pay and what's their responsibility

What It Covers

• Review of the agreement
• Advice on terms and effect
• Signing the certificate
• Usually one round of amendments

After Agreement

What to Do

1. Pay within agreed timeframe
2. Reference ready when requested
3. Stick to announcements agreed
4. Maintain confidentiality
5. Process final payroll correctly
6. Keep records securely

If They Breach

• Consider your remedies under the agreement
• Don't breach in response
• Take advice before acting

Common Mistakes

1. No Legal Advice Requirement

Without it, the agreement is invalid.

2. Vague Claim Wording

Be specific about which claims are being settled.

3. Lowballing

Offering too little may lead to rejection or tribunal.

4. Pressure Tactics

Giving insufficient time or pressure makes agreement vulnerable.

5. Not Specifying Tax Treatment

Leads to disputes about net vs gross payments.

6. Forgetting the Reference

The reference matters to the employee.

7. Not Including All Claims

Missing claims means they can still be brought.

Protected Conversations

What They Are

Discussions about settlement that can't be referred to in unfair dismissal claims.

Limitations

Protected conversations don't apply to:

• Discrimination claims
• Automatically unfair dismissal (whistleblowing, etc.)
• Where there's "improper behaviour"

Using Them

Can be useful for having frank discussions, but:

• Know the limits
• Don't rely on protection completely
• Behave properly throughout

Without Prejudice

What It Means

"Without prejudice" communications:

• Are made in genuine attempt to settle a dispute
• Cannot be referred to in court/tribunal

Requirements

• Must be a genuine dispute (or potential dispute)
• Must be a genuine attempt to settle
• Both parties expect confidentiality

Marking Documents

Label relevant documents "Without Prejudice" but:

• The label alone doesn't make it protected
• The content and context matter

Checklist for Employers

Before Offering

• Consider if settlement is appropriate
• Calculate potential exposure
• Determine budget
• Prepare draft agreement
• Brief relevant stakeholders

Making the Offer

• Choose approach (protected conversation, letter, meeting)
• Make clear it's without prejudice
• Specify what you're offering
• Include legal costs contribution
• Set reasonable deadline

Agreement Stage

• Negotiate final terms
• Ensure employee has legal advice
• Receive signed certificate from adviser
• Both parties sign agreement
• Keep signed copies

After Signing

• Make payments on time
• Provide agreed reference
• Maintain confidentiality
• Complete off-boarding
• File documents securely