Settlement Agreements Information Centre

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Controversial – What is the purpose of a settlement agreement?

Settlement agreements replaced compromise agreements in 2013.

They were renamed to make them less “confrontational”, but the aim remains the same: to get the employee to agree to waive their right to sue you for a perceived (or actual) wrong, in return for an amount of money.

A settlement agreement is particularly essential if you only want one employee to leave. Even if you follow the most perfect dismissal process, the now ex-employee can still accuse you of doing things wrong. Even worse, they could accuse you of discrimination, which is an area where the employer is guilty until proven innocent. You need a settlement agreement with the employee so that they give up their right to sue you, no matter what you have done.

If an employee is approached “out of the blue” then approaching them with a settlement agreement could get expensive as the employee realizes that they have the balance of power in negotiations: you are only offering them a settlement agreement because you want them to leave. They don’t have to sign the settlement agreement unless you offer them the “right” amount of money.

They are also comparing having their job, to not having their job but having some extra money.

However, when you introduce the notion of a settlement agreement during a formal HR process such as redundancy, disciplinary, or long-term sickness management, then it becomes clear to the employee that their options are:

  • Losing their job
  • Losing their job with some extra money

In this scenario, people are much more open to the negotiation, especially if they are aware that theirs may not be a weak claim” – think this should be a strong claim? It might not be a valid claim because the employer has followed the correct process and the employee does not have a protected characteristic.

The best times to offer a settlement agreement are:

  • If you want to make just one long-serving employee redundant, without unsettling the rest of the department by putting them at risk of redundancy;
  • If you are going through the formal redundancy or disciplinary process and the employee is raising grievance after grievance;
  • If the only person you want to make redundant is the only non-white employee in the company;
  • If you have evidence that the employee has committed gross misconduct, but you want to keep the details of what they have done secret;
  • If the person you want to go with earns above £50k, they almost always fight a dismissal.

The worst time to offer a settlement agreement is if you have no money to pay more than the notice period.

The painless way to know how much you should pay

It can be frustrating to think of paying an employee who has never been great, even more money. But you have to make a commercial decision: if I fire them, even with the correct process, how much will I have to pay in legal fees, time, and mental bandwidth to prove that I am right?

For a straightforward unfair dismissal case, you will be paying at least £9500 plus VAT to fight your corner. And if you win, they will not be asked to pay your legal fees. That almost never happens. So if you put the money and effort against the amount that needs to be paid to the employee, it is much easier to justify. With a settlement agreement, the whole situation is over and you can move on. With a court case, even if you win, it can be up to 2 years before you have a resolution. Is it really worth it on a point of principle?

Settlement agreements can be very quick and effective, but the amounts involved are not pocket changes. You’ll have to pay them more than their notice period (sometimes much more) as you’re actually paying them for giving up their right to sue the business.

So, to work out how much you should be paying, as a minimum, you need to pay them their notice period PLUS what they would have got if they had been made redundant PLUS a sum for giving up their right to sue you.

Visit our Settlement Agreement Calculator to find out more about our recommended payout.

We can draw up the settlement agreement for you, negotiate with the employee’s solicitor, and help you reach a mutual agreement, which means you avoid any danger of a tribunal claim against you.

Contact us if you would like to discuss using this very effective tool in your “new normal” business strategy.


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