A guide to the settlement agreement negotiations process. Skip to main content

Scope of this guide

This guide sets out how the process of negotiation is likely to work when the employer and employee are exploring the possibility of entering into a settlement agreement to resolve a dispute. The focus is on discussions taking place before the employment has terminated.

A settlement agreement is a legal document which deals with the termination of employment on agreed terms. When negotiating such an agreement, it is usual to specify that all communications should be treated as “without prejudice” and “subject to contract”. This means that the parties can speak freely in negotiations and anything said cannot be used against them in evidence should negotiations break down and a formal claim is brought in the employment tribunal. It also means that neither party is legally bound by anything discussed or apparently agreed in negotiations until a final written agreement is actually signed.

Although it is not compulsory, we would recommend that you seek legal advice from a Solicitor before you begin the negotiations, where possible. By doing so, you will have a better understanding on what to expect during the negotiations as well as how much money you may expect to receive on termination and any tax implications

We have a settlement agreement calculator which indicates what you could be entitled to.

Call us on 0113 218 5459 to discuss a Settlement Agreement

Why are negotiations opened?

An employer may want to propose a termination of employment on mutually agreed terms before there is any actual dispute with the employee. The employer may have a number of reasons and these will include perceived shortcomings in the employee’s performance, organisational changes or simply a clash of personalities. Rather than going through capability, redundancy or disciplinary proceedings with the risk of litigation and possible negative publicity, it is often seen by the employer as commercially beneficial to start confidential exit negotiations with a view to a financial settlement.

The employee may wish to start negotiations if he or she feels that their position in the business is no longer secure or they feel threatened, bullied, or harassed. Quite often, the employee may have been off sick for a period of time and simply does not wish to return. They may have lodged a formal grievance which would normally result in lengthy investigations and meetings when in fact, the employee simply wishes to leave but does not wish to walk away with nothing. The employee can request a ‘protected conversation’ with the employer. This essentially is a way of the employee putting the employer on notice that the employment is no longer tenable and that the employee would be inclined to terminate the contract of employment, under the terms of an agreement provided the terms are favourable. 

Common scenarios

Typically, the process of negotiation takes place in one of four scenarios.

1.  Where employment has already ended

The employee may be presented with a draft settlement agreement (marked “without prejudice and subject to contract”) and asked to take legal advice from a solicitor and revert to the employer within a fairly short timescale. Although it is a draconian and risky step, employers sometimes dismiss employees with immediate effect (or with a payment in lieu of notice) at the same time as handing them a draft settlement agreement with a deadline within which to respond.

A solicitor will discuss your employment rights, including the right not to be unfairly dismissed.

This is common in certain industries (for example, financial services) where the risks of keeping a discontented or potential disreputable employee in employment while negotiations are conducted are seen as too great. In such situations, the employer will usually have decided that the litigation risks (of claims for unfair dismissal) are smaller than the other commercial risks. In our experience, this often occurs in cases where the employer has already made up its mind to dismiss the employee and recognises that there will be a price to pay and will usually have factored in the enhanced bargaining position this gives the employee during negotiations.

It is a calculated risk but more often than not, a settlement agreement is concluded because this is almost always preferable to embarking upon costly and protracted litigation in the employment tribunal.

2.  Where employment and active duties continue

Here, the employee may be approached by their manager or human resources department and made an offer and given a draft settlement agreement. They are told to take it away and consider its contents, usually with the legal advice of a solicitor and respond within a timescale. The employee may remain in the workplace, actively carrying out their duties but asked to keep the discussions confidential including the fact that they have actually been given a draft agreement.

On the whole, this approach is more likely to be used where there is not a significant dispute between the employer and employee and the relationship has not broken down. It might be used, for example, where there is a likely redundancy situation or where there are ongoing performance issues which the employer does not wish to deal with on a formal basis.

In these circumstances, a solicitor can give an employee legal advice on their employment rights when faced with a potential dismissal by reason of redundancy or capability. A solicitor can also calculate an employees statutory redundancy entitlement and advise whether the amount of money being offered is reasonable including any tax implications

3.  Where the employment continues but the employee is not carrying out any duties

This may be arise where the employee is already on long term sick leave. Again, a draft agreement is presented and the employee is asked to respond. The legal advice of a solicitor is beneficial in these circumstances since a solicitor will usually consider employment rights and whether there are any issues concerning capability or discrimination on the grounds of disability. A longer timescale may be given because the situation is likely to be less immediately awkward where the parties are not interacting on a day to day basis. It is not uncommon for an employee who has lodged a grievance to go on long term sick leave creating a “no win” situation for both parties in which the relationship seems to have little prospect of returning to normal. These negotiations need to be conducted with care and sensitivity having regard to the employee’s health and possible disability issues. For example, a meeting off-site or at the employee’s home may be suggested.

4.  Where the employment continues but the employee is sent home

Here, the employee may be placed on garden leave or simply be told that it is better for them to remain at home whilst they consider the position. They will often also be asked not to have contact with colleagues or clients and their computer access may be disabled. Where the employment has not been terminated, the employer runs the risk of creating a hostile situation in which it may be difficult for the employee to envisage returning to active duties. Again, this approach is often used where the employer has already made up its mind that there must be a parting of the ways.

For help with settlement agreements call 0113 218 5459

Possible steps in a settlement discussion (employee still employed)

Step 1: invitation to meeting

The employer simply invites the employee to a meeting at a mutually convenient time and place. In most cases, the employer will not wish to notify the employee in advance that the purpose of the meeting is to discuss settlement. Of course this prevents the employee seeking legal advice from a solicitor ahead of the meeting. However, employees should not feel obliged to accept anything immediately. It may on the other hand be appropriate to refer to the underlying issue or dispute which has led the employer to make the offer and indicate that it is an informal discussion.

Step 2: at the meeting

The employer may explain its concerns (for example, performance issues or possible disciplinary proceedings, or a breakdown in the working relationship) in a neutral manner and propose an exit with an agreed settlement package. The employer should provide enough information for the employee to understand what has led to the offer and the potential consequences if they do not leave. There is a balance to be struck and employers should be cautious about providing excessive or detailed information as doing so could suggest that the outcome has been predetermined. It may also lead the employee to focus on defending the accusations rather than considering the settlement offer.

It is good practice for the employer to highlight that settlement discussions are expected to be inadmissible in any proceedings and that they will have no bearing on any subsequent performance management or disciplinary procedures. However, in practice, once the lid has been lifted on settlement discussions, it is often very difficult to retrieve the situation and for the employment relationship to continue as normal if a settlement is not in fact reached.

Step 3: written offer

If the employee agrees to explore the suggestion of settlement, the employer will then produce a written offer. This may be the actual agreement itself or simply a letter outlining the principal terms, including a provision with regards to how much money the employee may receive should they choose to accept the agreement. It will also state that the employee must take legal advice from a solicitor on the whole package and in the vast majority of cases, the employer will offer to pay a fixed contribution towards the employee’s legal costs. This is in our experience typically between £250 and £500 plus VAT. Good practice and indeed the Acas code of practice on settlement agreements suggest that an employee should as a general rule, be allowed 10 calendar days to consider the proposal. However, this is not set in stone and the parties may agree a shorter or longer period.

Step 4: settlement agreement

If they have not already done so, the employer will then provide the formal agreement and the employee will need to take independent legal advice. A solicitor will discuss the position with you and will want to understand why the agreement is being proposed. By doing so, the solicitor can give legal advice on your employment rights, whether the offer is reasonable, the consequences of signing a settlement agreement and any tax implications which may arise subject to the amount of money the employee is due to receive.

The settlement agreement usually allows for a clean break between the employer and employee. Subject to any post-termination restrictions the employee can look for an alternate job. The employer will usually incorporate a job reference into the agreement on agreed terms.

If the employee is not interested in exploring settlement, the employer should cease negotiations and seek to tackle the underlying problem.

Call our employment team on 0113 218 5459

Timing of negotiations

Where the employment has already ended, the fact that settlement negotiations are taking place does not alter the normal time limits for bringing a claim to the employment tribunal. This means that employees and their advisers should ensure that negotiations are complete, and the settlement agreement is signed prior to the last date for commencing proceedings or Early Conciliation. This is within 3 months of the date of termination of employment. This time limit is strict and employees should be careful to ensure that any deadline is not missed.

It is also in the employer’s interest to resolve matters fully well in advance of the time bar date in order to avoid further costs if the employee seeks to negotiate an increase in compensation or contribution towards legal costs if proceedings have already been issued. Employers may also find that the employee’s position hardens and discussions become more challenging once the employee has taken the step of lodging a formal claim. Therefore, both parties and their advisers should note the relevant time bar dates at the outset of any negotiation if the employment has already ended.

Contact Paul today

Settlement agreements are legal contracts between an employer and an employee (or former employee to terminate the contract of employment. We often see settlement agreements in the following circumstances: 

  1. Performance review
  2. Disciplinary process
  3. Redundancy 

The agreement usually contains provisions for the following:

  1. Payment in lieu of notice (unless the employer wants you to work your notice); 
  2. A sum equivalent to any accrued, unused holiday 

Any payment in lieu of notice and holiday pay with be subject to your usual tax and national insurance deductions.

Depending on the circumstances, sometimes there may be an ex-gratia (one-off) payment. This is often referred to as the termination payment and ideally should be an incentivised sum of money to sign the agreement. This sum is tax free up to £30,000.

Whilst there is no legal obligation for an employer to provide a job reference, a factual reference is often appended to the settlement agreement. The content of the reference is usually confined to the job title and length of service.

The law stipulates that it is a legal requirement for a solicitor (or other accredited advisor, for example a trade union official) to review the terms of a settlement agreement.

A solicitor will review the terms of the agreement and give legal advice on whether the terms are favourable. We do not only consider the financial elements but also whether there are any restrictions which may stop you finding a new job. Also, a solicitor will consider your employment rights including whether there is any discrimination or potential flaws which may give rise to a potential claim.

These agreements are designed to draw an employment contract to a close or to make amendments to a contract in a fair and reasonable way. You should not be prejudiced as a result of the process.

It is normal for the employer to contribute towards the employees legal costs and this is typically between £250 and £500 plus Vat.

Our employment solicitors are acknowledged in Legal 500 and Chambers & Partners as being highly experienced in settlement agreements. Where appropriate we will negotiate the terms of an Agreement on your behalf and ensure that your best interests are fully protected.

Employers tend to favour settlement agreements because they can resolve disputes amicably and quickly but also, the terms of the agreement ensure no claim can be brought in the future by the employee.

Settlement agreements can also be highly cost effective for both the employer and the employee. If a claim is brought in the employment tribunal, legal costs are not recoverable therefore, terminating employment under the terms of a settlement agreement can save time, money and stress. 

The money is usually transferred to you between 14 and 28 days from signing the agreement or the termination of your employment. It is often expressed in the agreement when you will receive your money. We also see reference to the money being paid to the employee on the next payroll.

This depends upon a number of factors including salary, age and length of employment.

We also consider whether there is any underlying dispute such as any discrimination towards the employee and whether the employer is afraid of any reputational damage which may result if proceedings were issued as normally these will become public.

The employee’s notice period will also be a significant factor and is usually the starting point for the settlement figure. 
An average termination payment would be around 2 to 4 months gross pay which is in additional to the other components including notice pay and holiday pay (where applicable). 

Our settlement agreement calculator can give you and idea of what amount could be paid.