Settlement agreements: practical guidance for UK employers

Whether you’re an HR professional, a manager, or a business owner, settlement agreements are essential tools in your toolkit. They’re a legally binding way to part ways with an employee while avoiding costly and time-consuming tribunal claims.

But how does it all work? In this guide for employers, we’ll break down the basics, highlight the benefits and drawbacks, and share some practical tips on using settlement agreements effectively.

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When to consider using a settlement agreement

Settlement agreements are usually introduced through either a protected conversation or a without prejudice conversation. Both are ‘off the record’ which means nothing said can be used in a case against the employer. However, there are specific legal requirements for each conversation to ensure its protected.

This means that even if both parties agree something is ‘off the record’ it might not be, if you’ve not met the legal threshold. It’s always worth double checking this point with an HR professional.

The essentials: what’s involved?

In simple terms, a settlement agreement is a formal agreement between an employer and an employee when their employment ends. The employer offers a sum of money, and in return, the employee agrees to waive their right to take the matter to an employment tribunal.

However, there are some claims that can’t be waived under a settlement agreement. Most notably, claims related to whistleblowing or injury claims cannot be waived, regardless of the terms of the agreement. This is to ensure that an employee’s basic rights are protected, even if they choose to accept a financial settlement.

Key points

The employer agrees to make a payment to the employee.
The employee waives the right to bring certain claims to an employment tribunal, including for unfair dismissal, breach of contract, and other employment-related issues (except for whistleblowing and personal injury claims).
It’s not always necessary for a disciplinary process to have been started before offering a Settlement Agreement.
Settlement discussions should be approached with care and should never come “out of the blue”. Ideally, they should stem from a clear rationale – such as resolving a conflict or supporting an employee’s decision to leave.
The employee must receive independent legal advice before signing. Usually, the employer covers some or all of the costs of this advice.

Benefits of using settlement agreements

Conflict-free exit
It provides a relatively smooth and amicable exit, which is beneficial when emotions are high, or the situation is difficult.
Less time, less stress
Settlement agreements can save a lot of time and hassle in managing difficult situations and reduce the potential emotional toll on both the employee and the employer. Many agreements are completed in a few short weeks.
Protecting team morale
When a difficult situation drags on, it doesn’t only affect the people directly involved – the whole team can feel the ripple effects. By resolving disputes quickly, you can avoid the potential negative impact on team productivity or morale.
Peace of mind
Many businesses would happily pay some additional costs for the peace of mind that comes from knowing a costly claim cannot be brought against them in the future.
Custom and practice
For some roles, particularly those with complex benefits structures that may include bonuses, stocks or shares, exit via settlement is considered commonplace to create a space for off-the-record conversations.

Potential downsides of settlement agreements

Short-term fix for long-term issues
They can sometimes be an easy way out for managers, rather than addressing the root causes of workplace issues.
Setting expectations
There’s a risk that employees start to expect a financial payoff whenever a dispute arises. This could encourage them to raise financially motivated claims.
The potential for breakdown in negotiations
Settlement agreements do not work well when an employer is solely relying on them to resolve a dispute and has no viable alternative if the employee rejects the offer.

Top tips for using settlement agreements effectively

If you’re considering a settlement agreement, here are eight key tips to ensure the process runs smoothly and the outcome is as beneficial as possible for both parties. If you’d like further support, get in touch.

Understand your alternative
Employees cannot be forced to sign settlement agreements, and if they were forced, this would legally invalidate the agreement. That means they have the right to say no. You need to be able to clearly explain what the alternative is if they turn down the offer i.e. redundancy, performance management, capability etc.
Be prepared to negotiate
Your employee is now receiving legal advice, and their solicitor’s role is to work in their client’s best interest. This means they will likely want to negotiate up their offer. Be prepared for this, and don’t start at the top of your budget.
But, don’t offend them!
The settlement’s that we have seen drag on for months normally involve as many hurt feelings as legal complexities. While you need space to negotiate upwards, a completely offensive or dismissive offer may insult an employee and encourage them to ‘fight’ for more, which quickly accrues legal costs, so pick your starting point carefully.
Give them time to consider
Don’t rush the process and allow for negotiation in your timelines. ACAS require at least 10 calendar days to consider the agreement, though this can be adjusted based on the situation. The key is to avoid undue pressure, as this invalidates the agreement.
Avoid threats
If it is deemed that an employer has threatened an employee, this could invalidate the whole agreement. While it’s important to be clear about possible alternatives, you do not want to pre-determine any outcomes. Language and nuance are key in this respect, and there are subtle differences. Speaking to HR about this is usually advised.
Be specific in the agreement
Don’t go overboard trying to cover every possible claim. Be specific about what you’re protecting against to ensure the agreement is enforceable. This will make your settlement agreement stronger in the eyes of the law.
Keep it simple
Avoid too much legal jargon. The purpose of the agreement is to resolve issues, not create new ones. Use plain language wherever possible and keep the tone respectful. You want the employee to work with you, not against you!
Put it in writing
While it might be tempting to keep everything off record, putting key points in writing can actually help avoid misunderstandings. It also clarifies each party’s position. But, double check that the communication is protected.

Are settlement agreements ever amicable?

Yes! It might surprise you, but we’ve supported clients with settlement agreements that have been mutually beneficial for both parties.

We’ve had employers instruct us to ensure the employee feels respected and valued, and we’ve had employees offer to extend their notice periods to support the handover.

We’ve even received thank you emails from both parties and updates on the leaving party – no, we’re not making this up!

While settlement agreements are known for being a challenging area in employment law, and not every story has a happy ending, we support our clients every step of the way to achieve their desired outcome.

The key to amicable settlement agreements is both parties feeling heard and respected. Emotions are often high, and that is why having a third party who are practiced mediators can often facilitate the best outcome for everyone.

How Jaluch can help

Thinking about a settlement agreement but not sure where to start? We’re here to make it easier.

We help employers handle these situations calmly and professionally – from deciding if it’s the right step, to drafting the paperwork, to supporting conversations with your employee.

Whether you need quick advice or hands-on help, we’ll guide you through it. Get in touch to talk through the options.

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Legal disclaimer: The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.