Settlement Agreements for Employers
A settlement agreement can provide a mutually agreed way to end employment or resolve a dispute. It can be useful where there is a genuine breakdown in the working relationship, a difficult capability situation or another employment issue that both sides would prefer to resolve without a lengthy process. It is not a substitute for managing risk or a guarantee that an employee will agree.
At a Glance: Settlement Agreements for Employers
- Legally Binding Waiver: Employees waive specified statutory and contractual claims in return for agreed compensation and agreed terms.
- Mandatory Independent Advice: The agreement is void unless the employee receives independent advice from a certified adviser or solicitor.
- ACAS 10-Day Window: Employers should allow a minimum of 10 calendar days for consideration to avoid claims of undue pressure.
- No Retaliation on Rejection: An employee cannot be penalised for declining an offer; the employer must resume a fair, documented process.
What does a settlement agreement actually do?
A settlement agreement is a legally binding agreement between an employer and an employee. It usually involves the employee receiving an agreed payment or other benefits in return for agreeing not to bring certain legal claims against their employer. For the agreement to be legally valid, the employee must receive independent advice, and the agreement must clearly state which claims are being settled.
Can I offer one without starting a formal process?
Sometimes. An employer may explore a voluntary exit without first completing a disciplinary or capability procedure. But you should understand the underlying facts and what would happen if the offer is rejected. Do not use settlement discussions to disguise discrimination, retaliation or a decision already taken without proper consideration.
The Settlement Agreement Checklist: Key Terms, Legal Sign-off, and Tax-Exempt Thresholds
Protected conversation or without prejudice?
These are different legal concepts. Section 111A of the Employment Rights Act 1996 may protect qualifying pre termination negotiations from being admitted in ordinary unfair dismissal proceedings, subject to limits including improper behaviour. Without prejudice protection generally requires an existing dispute and a genuine attempt to settle it. Neither label automatically protects everything said, and neither provides blanket protection against discrimination or whistleblowing claims.
Section 111A Negotiations
No existing dispute required. Useful for introducing exit terms out of the blue during performance or capability reviews.
Exclusively protects against ordinary unfair dismissal claims.Without Prejudice Discussions
Requires an ongoing dispute (e.g. raised grievance or formal disciplinary appeal) and an attempt to reach settlement.
Covers all claims, but requires clear evidence of a genuine dispute.What terms should an employer consider?
Common points include the termination date, notice and accrued holiday, any additional compensation, the tax treatment of each payment, benefits, confidentiality provisions, reference wording, internal and external announcements, return of property and any ongoing restrictions. Legal advice is important when drafting enforceable terms and considering tax treatment.
How much should I offer?
There is no standard figure. Consider the contractual entitlements, legal exposure, strength of the evidence, likely time and cost of a formal process, business impact and what the employee may reasonably accept. A larger offer does not necessarily make a flawed approach safe.
How long should an employee have to consider the offer?
The ACAS Code of Practice on Settlement Agreements recommends allowing a reasonable period, with ten calendar days as a general minimum to consider formal written terms and obtain independent advice, unless the parties agree otherwise. Avoid artificial deadlines or pressure.
What if they reject it?
A settlement agreement is voluntary. If the employee declines, employment continues unless and until it ends lawfully through another route. The employer may need to proceed with the underlying HR process fairly. Do not penalise an employee simply for rejecting a proposal.
How Nectar HR can help
Nectar HR can help you evaluate whether a settlement approach is appropriate, plan the conversation, prepare the HR position and manage any parallel performance, grievance or disciplinary process. We can work alongside employment solicitors on the legal agreement.
Got an employee problem?
Nectar HR can help you evaluate whether a settlement approach is appropriate, plan the conversation, prepare the HR position and manage any parallel performance, grievance or disciplinary process. We can work alongside employment solicitors on the legal agreement.
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