Settlement agreements- essentials for employers

I’m an employer and everything is going well with my staff – why do I need to know about settlement agreements? 

That’s great, and we don’t want to sound like the voice of doom but it’s always good to be informed about the tools that are available should things change or should you encounter unexpected difficulties with your employees. So we’d like to explain some key points about settlement agreements. That way,  you are better equipped to deal with the things that life (or your employees) might throw at you.


Settlement agreements are for settling a tribunal claim, right?

Sometimes, but they can be useful in many other circumstances too. For example, these agreements are often used in voluntary redundancy arrangements, reorganisations or when performance issues have led to a desire to terminate employment. Settlement agreements are an incredibly useful tool available to employers. They can provide freedom to decide what is best for your business, to take control of staff issues and to bring disputes or anticipated employee problems to well-managed close.

What are the advantages to employers of entering into a settlement agreement?

We find that our employer clients appreciate the certainty that these agreements provide. They allow the employer to focus on their commercial aims and avoid protracted disputes or time-consuming performance or redundancy processes. By signing a settlement agreement, the employee waives their right to bring various statutory and contractual employment law claims.

In return, the employer will usually provide various undertakings and make a payment of compensation.  This means that both parties can move forward knowing exactly where stand and that they won’t be seeing each other in the employment tribunal. Importantly, these agreements can include obligations on employees to keep things confidential. They can achieve a swift and quiet exit of an employee to minimise disruption to the business and other staff.

Finally, settlement agreements can also be useful to protect a business’ proprietary information and can be used to impose post termination restrictions where an employment contract fails to do so.

What is in it for the employee?

There are many reasons why these agreements can be attractive to staff. Chief amongst these are that they may allow the employee to avoid the stigma of dismissal, can keep a termination amicable and, of course, there is usually a financial incentive of compensation.

What do I need to do if I’m thinking that a settlement agreement may be the way forward?

It is important to do some preparation before presenting a agreement settlement. This may be paving the way for a performance improvement process, having initial discussions on redundancy or raising disciplinary issues. To be most effective, the agreement must have a context in which it is presented. When it comes to presenting the agreement itself, the conversation with the employee should be well prepared. You will want to ensure that the conversation remains confidential.

How do I make sure that things stay confidential?

A conversation will be ‘protected’ from disclosure by the employee if it meets certain criteria. These criteria are legally prescribed so it is best to take advice early to ensure that the conversation remains ‘off the record’. It is important to remember that if a discussion is discriminatory or could be viewed as an automatically unfair dismissal in the eyes of the law, then it will not be protected and could come back to haunt you. 

Can I have some guidance on protected conversations?

ACAS has very helpful guidance available here:
Also, Ergo Law can provide you with all the information you need about how to hold these conversations and can even script a meeting for you to ensure you say the right things. Let us know if you’d find this helpful.

What does employment law say about settlement agreements?

Because an employee is waiving their statutory rights, the law imposes certain standards before an agreement will be properly binding.  The contract must be in writing and must confirm that it complies with certain specific pieces of legislation. In order to validly waive their rights, the employee must take insured independent legal advice before signing. These are some examples of the legal requirements which must be met for the agreement to be valid and enforceable. When a settlement agreement is properly drafted, the employer can be confident that the employee will have waived their right to later bring an employment tribunal claim.

How are termination payments taxed?

Not all payments made under a settlement agreement are tax free. There are limits to the level of compensation payable without deduction of income tax, currently set at £30,000. It is important to consider the whole story of the employment relationship (including the employment contract) to understand which payments are truly capable of being paid tax free. One useful point to note is that even when a compensation payment exceeds £30,000, the excess does not require to have NICs deducted. Understanding the tax treatment of payments at an early stage allows both the employer and employee to make an informed decision and means that matters are more likely to conclude smoothly.

How do I go about negotiating a settlement agreement with an employee?

It is important to remember that the presentation of a settlement agreement is effectively an offer. Nothing is final until a properly drafted agreement is signed by both parties. Presenting the settlement package in the most effective way coupled with an effective negotiation is key to a successful settlement. Negotiation is best achieved when the bargaining position and interests of both parties are fully understood so it is a good idea to stand in the shoes of the employee and consider which issues will be most important to them. For example, in some circumstances, a favourable reference can be as valuable to an employee as a payment of compensation. 

What can Ergo Law do to support me?

We are experienced at drafting and negotiating settlement agreements on behalf of businesses in many different circumstances. We can guide you through the process from the first conversation right up to signing the agreement and can undertake all the negotiation on your behalf to minimise the stress, time and disruption to your business. If you have any questions about how to initiate a settlement agreement discussion with one of your employees, please get in touch - we’d be delighted to hear from you.