Settlement Agreements

What is a Settlement Agreement

It is difficult sometimes to get rid of an employee. The law requires you go through a process that sometimes can be very lengthy. There is a quicker way to do this: settlement agreements.

What is a settlement agreement?

A settlement agreement is the name of an agreement that can be a very neat and tidy, albeit sometimes expensive way to part company with an employee. It is an agreement where you give the ex-employee money, and they agree not to sue you.

You can use a settlement agreement at any time in the employment relationship, whether there is already a dispute (disciplinary, grievance) or not (they are just not suitable for the role, but you know they will kick off if you try to dismiss them).

Why would I need a settlement agreement?

The aim of a settlement agreement is to part company quickly whilst you take away the employee’s ability to sue you at employment tribunal, for almost anything related to their employment.

For them to give up this right, you have to give them money. The settlement agreement sets out clearly what monies they will get, and what rights to sue you they have given up.

A settlement agreement used to be called a compromise agreement.

You can start a settlement agreement process at any time. However, it is more usual to offer them a conversation to discuss this at the end of a disciplinary or grievance process, or the final stages of redundancy consultation.

There are several reasons for using a settlement agreement because:

  • you want them to leave quickly, so don’t want to follow the “normal” process.
  • you know you have done an incorrect process
  • you know that the accusations they have made against the company are true (e.g. bullying, discrimination)
  • you want to avoid hefty legal fees
  • you want closure and to move on with business
  • you want to employ someone new after a redundancy process and can’t if the ex-employee can still sue you

How much should I offer in a settlement agreement?

You can offer as much or as little as you want, but the key thing to remember is that the employee does not have to accept your offer, and there is no way to “make” them. There are ways to persuade them though, which we will look at later in this section.

The normal ballpark figure that we suggest getting a settlement agreement signed is a minimum of:

  • notice period, subject to tax and NI
  • accrued untaken holiday pay, subject to tax and NI
  • an ex-gratia amount which is tax-free up to £30,000

The ex-gratia amount in the settlement agreement usually starts at the amount they would get under statutory rules if they were made redundant.

The statutory cap on redundancy pay is £643 for every completed year of service. This figure does not need to be legally the same as that for redundancy, it is just to give a starting point for the negotiations.

For example, an employee who is 40 years old and has been with you for 12 years, would have 12 weeks’ notice owed, and may have some holiday, and we would start the negotiations for the ex-gratia amount at £7716 tax free.

You need to note, that depending on their protected characteristics and the context of the offer, this is the absolute minimum that you can start negotiations at. The ex-gratia amount should not be seen as the maximum.

The amount you offer should be a commercial decision, not a legal one. You will always need to weigh the legal costs of fighting a claim, as well as the time and hassle, against the closure you will get for giving the ex-employee some money to go away.

Even if you have carried out the perfect process to dismiss them, you will still have to pay to defend your case in tribunal. And you will never get those costs back (only 1% of the time are employees required to pay the employers legal costs).

And while you don’t want to give them any more money on principle, sometimes making the commercial decision is better for your business than “being right”.

Want to know how much you should pay?

Visit our Settlement Agreement Calculator to find our recommended payout

What other costs are there in a settlement agreement?

You have to pay their costs for legal advice. If they do not have proper legal advice, then the paper that the settlement agreement is written on is worth more than the agreement itself.

You would be expected to pay between £500 and £650 plus VAT for solicitor’s fees. They will invoice you directly after the settlement agreement has been signed.

We do occasionally have solicitors who seem to see the figures above as the starting point, not the cap. Depending on the seriousness of the situation, we would occasionally agree to pay more.

Alternatively, we can increase the amount paid to the individual and ask them to pay their solicitor directly. This is only for amounts above the cap of £500 plus VAT.

The employee cannot waive their right to legal advice. If they say that they do not need advice, that they are happy to sign, do not let them. The agreement is invalid if they do not have the advice. Just like H&S legislation, they cannot waive their right to protection.

No legal advice, no money.

What are the steps to a successful settlement agreement?

The first step to a successful settlement agreement is to have “the conversation”. You will need to have what is called a “without prejudice” conversation, which means it is off the record and can’t be used in a court of law.


Click here to download our script for doing a without prejudice conversation, the first step to getting a signed settlement agreement.

When you ask the employee/ex-employee if they would be willing to have a without-prejudice conversation, you need to be aware that they do not have to agree to have the conversation, let alone to the settlement agreement offer.

You cannot force the Employee to agree to a conversation. But usually when you tell them that all they have to do is listen, they do not have to agree to anything, then natural human curiosity takes over.

In the without-prejudice conversation, you need to keep the wording very general and “probable”: “You may be subject to a disciplinary process and you may be dismissed at the end, so we would like to offer you the option to avoid the process and offer the following amount…”

The idea of the without-prejudice conversation is to get their initial agreement to the offer on the table. Therefore, it is essential that you discuss the amounts you are offering with them in this conversation.

Please be aware that even if they say yes in this meeting, it is not legally binding, and you should not be upset if they come back and ask for more money. It is just part of the process.

The advantage of stating how much you are offering is that you will then see their immediate physical reaction.

If they say something like “You aren’t getting rid of me for anything less that £50k” then you might want to leave the conversation at that point.

The conversation is very much a sales pitch to get them to agree.

Once you’ve had the conversation, please come back to us with the agreed numbers so we can draft the agreement. We can draft settlement agreements for non-retained clients, please contact us for our fixed price quote.

Want to know more? Visit the Settlement Agreements Information Centre Now!

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