When to use a settlement agreement is an important question for employers dealing difficult workplace situations. A settlement agreement can be useful where the business wants to resolve a dispute, avoid a lengthy process, or agree an employee’s exit on clear terms.
Settlement agreements can be effective, but they should not be used casually. Employers need to consider whether the situation is suitable, whether the offer is commercially sensible, and whether the discussions are being handled in the right way.
If used properly, a settlement agreement can give both sides certainty. The employee receives agreed terms, and the employer reduces the risk of future employment tribunal claims. However, if the approach is badly handled, it can create further conflict or legal risk.
If you need practical guidance before starting settlement discussions, you can visit our free initial employment law advice page. Early advice can help you decide whether a settlement agreement is appropriate or whether another process should be followed.
When to use a settlement agreement in workplace disputes
A settlement agreement may be appropriate where there is an existing workplace dispute and both sides want to bring matters to an end. This might involve a grievance, disciplinary issue, sickness absence dispute, performance concern, redundancy situation or breakdown in working relationships.
In some cases, continuing with the formal process may be time-consuming, stressful and commercially unattractive. A settlement agreement can provide a controlled route to resolution.
However, the employer should still understand the underlying risk. If the employee has a strong claim, the offer may need to reflect that. If the employee’s position is weak, the business may decide that a smaller commercial offer, or no offer at all, is appropriate.
When to use a settlement agreement instead of a long process
Employers sometimes consider settlement where a formal disciplinary, capability or redundancy process would take time and carry risk. This can be sensible, particularly where both parties may prefer a clean break.
For example, an employee may be underperforming, but the process needed to manage performance fairly could take several weeks or months. Alternatively, there may be a grievance or sickness absence issue that has made the relationship difficult to repair.
A settlement agreement can avoid a drawn-out process, but employers should not treat it as a shortcut without thinking through the risks. If the employee refuses the offer, the business may still need to continue with a fair process.
When to use a settlement agreement for a problem employee
Some employers consider settlement where an employee has become difficult to manage. This may involve conduct concerns, repeated complaints, workplace conflict, poor performance, refusal to follow instructions or a loss of trust.
In these situations, settlement may be a practical option, but the employer should avoid language that sounds aggressive, predetermined or unfair. The discussion should be handled professionally and with care.
If the situation involves possible disciplinary action, you may also find our disciplinary procedures guide for employers useful before deciding whether settlement is the right route.
Settlement agreements and redundancy situations
Settlement agreements are sometimes used in redundancy situations, especially where the employer wants additional certainty or where there is a risk of dispute.
However, employers should be careful. A redundancy process should not be presented as final before consultation has happened. If settlement is discussed too early or too bluntly, the employee may argue that the outcome was already decided.
Settlement may still be useful where both sides prefer agreed terms, but the wider redundancy process should be considered carefully. If redundancy consultation is involved, our guide to the redundancy consultation process for UK employers may also help.
Making a protected conversation
Employers often want settlement discussions to remain confidential. In some cases, “without prejudice” or protected conversations may help, but this area needs care.
The protection may depend on the circumstances. For example, whether there is already a dispute, what is said, how the offer is made, and whether there has been improper pressure or behaviour.
Employers should avoid threatening dismissal, applying undue pressure, or presenting the settlement as the only possible outcome. A badly handled conversation may later be used against the business.
How much should an employer offer?
There is no single correct amount for a settlement agreement. The offer will usually depend on the facts, the employee’s length of service, salary, notice entitlement, possible claims, legal risk and the commercial value of resolving the matter.
Employers should also consider whether the employee has strong negotiating points. These may include discrimination allegations, whistleblowing concerns, a flawed dismissal process, unpaid wages, redundancy concerns or long service.
The aim is not always to make the lowest possible offer. The aim is to make a commercially sensible offer that has a realistic chance of resolving the issue.
What should a settlement agreement cover?
A settlement agreement will usually set out the agreed payments, termination date, notice arrangements, holiday pay, confidentiality terms, reference wording and waiver of claims.
The employee will usually need independent legal advice before the agreement becomes binding. Employers often contribute towards the employee’s legal advice costs, although the amount may vary depending on the circumstances.
The agreement should be clear and accurate. Poor drafting can create uncertainty, especially around tax, confidentiality, restrictive covenants, references or what claims are being settled.
When not to use a settlement agreement
A settlement agreement may not be the right option where the employer has not properly understood the facts, where the issue can be resolved informally, or where the business is using settlement to avoid basic fairness.
It may also be unwise where the offer is likely to inflame the situation or where the employee has not yet been given a fair opportunity to respond to the employer’s concerns.
In some cases, the better approach may be to follow the correct disciplinary, grievance, sickness absence or redundancy process first.
Getting advice before making an offer
Before making an offer, employers should gather the relevant documents and assess the risk. Useful documents may include the contract, disciplinary records, grievance documents, absence records, redundancy papers, emails, meeting notes and any previous warnings.
It is also worth preparing a short timeline of events. This helps identify the legal and commercial risks before the employer starts discussions.
If the matter is already close to a tribunal claim, you may also find our employment tribunal solicitors for employers page useful.
Final thoughts
Knowing when to use a settlement agreement can help employers resolve difficult workplace issues before they become more expensive and time-consuming.
A settlement agreement may be useful where there is a dispute, a damaged working relationship, a potential claim, or a business need for certainty. However, the employer should consider the facts carefully before making an offer.
For wider support, visit our free employment law advice for employers page.