Settlement agreement negotiations are somewhat of a ‘dark art’, with few employees knowing how best to handle them because they are a once-per-career event, while for employment lawyers, they are bread-and-butter work.

What is a settlement agreement?

Settlement agreements are a way for an employer to part company with an employee on agreed terms. That draws a line under the employment relationship. The employer can obtain promises not to bring tribunal claims, to keep the matter confidential and not to post negative things on social media. In return, the employee can obtain an agreed reference and a sum of money on top of their legal entitlements.

In order to avoid the employee using the situation in later legal proceedings, if settlement agreement negotiations fail, communications about the settlement agreement will usually be ‘without prejudice’. This means that both parties can speak freely during the settlement agreement negotiations.

However, it also means that neither the employer or employee can hold the other to anything they’ve agreed to, until both of them have signed the agreement and a lawyer has certificated it. 

Settlement agreements can be given in a number of situations:

  • in a ‘protected conversation‘ out of the blue; or during
  • performance management;
  • disciplinary procedures;
  • redundancy consultations;
  • grievance situations.

Settlement agreement negotiation – what is the ideal outcome?

Typically, employees will wish to negotiate their offer to a sum that feels fair to them. Employers are keen to save costs with settlement agreements and avoid any protracted dispute, so in most cases, their first offer will not be their last one.

Before starting the settlement agreement negotiations, employees should have a clear idea of what their ideal outcome would be; typically employees want more money and a reference.

If the employee has a weak legal case then they can’t expect to negotiate a high sum. On the other hand, a cast-iron case could mean that the settlement agreement negotiation ends up at over a year’s salary. There are two figures that can be attractive. One is the £30k maximum that can be paid to an employee tax-free at the end of an employment relationship. The other is 12 months salary up to a maximum of £100k or so, which is the sum a tribunal can award (this figure is valid in 2023; it changes each year) for Unfair Dismissal.

The higher an employee’s chance of success at a tribunal, the more they can negotiate for. A solicitor can help decide how strong the case is and what a sensible settlement amount would be.

Tribunal threats

If the employer is unwilling to budge on the amount, an employee may reject the offer to show they are serious about taking the case to a tribunal. As mentioned, businesses usually wish to minimise costs and bad publicity, so they often offer more money as a result.

For example, we recently had a client who was offered a settlement agreement for ongoing punctuality issues, which were not his fault entirely. After some negotiation, and a guarded threat of litigation, we were able to negotiate up from a settlement agreement worth two months of salary to five months.

Sometimes this ‘threat’ comes in the form of a lawyer’s letter; sometimes the employee prefers to to keep lawyers in the background and instead raise a grievance. It’s a case-by-case decision.

Resigning weakens an employee’s position

Unless there is a really strong constructive dismissal case, handing in a resignation may hinder negotiations for the employee.

Resigning means that the employer has little incentive to negotiate a better deal, since the employee has already left; since the whole point of a settlement agreement is to pay the employee to leave and prevent them from brining a claim, the resigning employee removes the immediate problem, playing into the employer’s hands.

Employers can play with a straight bat to improve their position

The employee in a settlement agreement negotiation wants to avoid a fair dismissal – that brings no compensation and is a weak bargaining position.

The employer typically wants to show that if the negotiations fail, it has a good case for a fair dismissal. There are only a few fair reasons to dismiss and they are misconduct, poor performance, redundancy or the catch-all of ‘some other substantial reason’ (this last one is rarely used).

To show that it is serious about potentially dismissing for a fair reason, the employer can start the formal disciplinary, performance or redundancy process and keep it going while the settlement agreement negotiations continue. That gives the employee a ‘ticking clock’ to deal with. Or the employer can threaten to break off the settlement agreement negotiations altogether and start the formal process instead.

It is not easy to wind back in a settlement agreement negotiation whilst retaining credibility, so neither party should over play its hand in a settlement agreement negotiation.

A typical case

In a recent example drawn from our archives, we’ve had a client who was a senior executive at a company that is a household name. He was called into a meeting out of the blue and offered his notice pay plus a month’s salary to depart, with the threat that he would be put on a performance improvement plan if he didn’t sign.

We advised him that it would take the company longer than a month to take him through the performance improvement plan and so even longer in the worst-case scenario. And therefore, this was an offer to reject at the early stage of settlement agreement negotiations. We persuaded the employer that he had a good chance of overcoming the PIP and put together a case for a grievance that pointed towards his legal rights having been breached by the employer. Remember, the employer can’t say to a tribunal “these allegations aren’t genuine – the employee is only reacting to a settlement agreement proposal” because the process is off the record and that goes both ways.

After a hard-fought battle of correspondence between the parties, during which threats of litigation were made, a negotiation ensued which gave the client a further two months of salary, giving him a total of six months’ salary. We advised him to accept this offer as it resembled a sum similar to what he ‘might’ be awarded by a tribunal, if he brought a claim and won.