Settlement agreements for employers

Occasionally, you will find that your relationship with your employee is not working out to your mutual advantage.  You may wish to terminate their employment but you do not have the time to follow a fair procedure, or you wish to avoid them bringing a claim against you at a later stage.  You may be willing to pay the employee some money to smooth the way and encourage them not to claim against you.

In most situations it is possible to simply use the words 'in full and final settlement' to confirm that a deal has been struck.  But that is not the case with employment law claims. 

The various Acts of Parliament and Regulations that provide employees with rights all that they are are not able to sign away their claims 'unless'.  The 'unless' is that they do so through a formal agreement, with the benefit of legal advice from a qualified lawyer who explains the content of the agreement to them before they sign.

We call this a settlement agreement, which is a legally binding formal agreement to terminate their employment.

We have an efficient and pragmatic system for working with employers throughout the whole process, from guiding you through the initial conversation with the employee, drafting the settlement agreement and any subsequent negotiations.

Here, we answer some of the most commonly asked questions we experience to help you understand the use of settlement agreements:

What is a settlement agreement?

A Settlement Agreement (sometimes referred to as a severance agreement, separation or release agreement and formerly known as Compromise Agreement) is a formal agreement which terminates the employment of an employee on agreed terms.

Usually the settlement agreement includes the payment of a lump sum by way of compensation and it may also include:

  • Details relating to their pension, bonus, holiday and company car arrangements
  • An agreed reference or an announcement to your staff and customers
  • Restrictive covenants to protect your business from competition after the employee leaves

To be a binding agreement your employee needs to take advice from a qualified solicitor or trade union representative which will be confirmed in a certificate usually attached to the agreement.

What is the process of drafting a settlement agreement to give to my employee?

If you wish to offer your employee a Settlement Agreement there are two steps you need to take prior to discussing this with them:

  • Understanding how to have the right conversation with them in broaching the subject to not leave you open to potential claims against you.
  • A draft settlement agreement to give them in this meeting.

We can assist with both of these steps; we have a guidance script we can tailor for your particular situation, and we use a drafting checking to enable you to easily inform us of all the details we need to prepare the settlement agreement for you.  You can rest assured our documents are always up to date and you have an agreement you can rely on, as we not only work from our own experience and knowledge, but also a legal precedent maintained by Practical Law Company (PLC).

To start the process with your employee you will need to arrange to meet with them.  It is not a requirement that they are accompanied at the meeting (as would be the case with other formal processes in employment) and you do not need to give them any prior warning of the meeting taking place.

Once you have met with your employee, we are happy to take over the negotiation of the final agreement for you.  You can provide your employee with our contact details so that they can arrange for their solicitor to speak directly with us.  We will then be in the position to finalise any drafting issues that their solicitor might raise, or negotiate with them on your behalf in accordance with pre-agreed parameters.

We will ensure that the final agreement is properly executed and signed by both your employee and their legal representative before returning it to you for completion.

How much will a settlement agreement cost my business?

Every employment situation is different, therefore the associated costs will also be.  There are three areas of costs when considering a settlement agreement:

  1. Compensation payable to the employee
  2. Legal fees for the employee
  3. Legal fees for the advice you receive

The amount that you will need to pay to your employee to agree to a settlement will depend on:

  • Their length of service
  • The reason why you want to bring their employment to an end
  • Whether they will be able to find alternative employment quickly
  • Their current salary and benefits package
  • The risk you perceive there to be of them pursuing matters to an Employment Tribunal if you were simply to dismiss

We can advise you of the appropriate level of offer to make, and the likely outcome of any Employment Tribunal litigation.  Not only this, we can help you negotiate a fair deal for the termination package.

In addition to the compensation that you offer to the employee you will need to factor in a payment for their legal advice.  As it is a legal requirement for your employee to take legal advice in order for a settlement agreement to be effective, most employers will pay a contribution to the cost of obtaining that advice.  Often this will be £250 + VAT, however we can advise you on the appropriate budget as there are situations where the contribution may need to be greater, for example if there is a more senior employee departing, if there are complexities to the deal such as share options or restrictive covenants to be advised on and if there are significant litigation risks.

While it is not a legal requirement for an employer to seek legal advice from a solicitor, it is very rare that an employer would feel confident, or have the time, to draft a settlement agreement themselves, and conduct the subsequent negotiations.  There is a charge for the advice you receive from us, for preparing the necessary documents and further negotiations.  We operate on an hourly rate basis which means that we charge for our time according to the amount of time you use.  £250 + VAT will allow you approximately an hour of time, and we would usually anticipate the fees for preparing and finalising a settlement agreement to be between £750 and £1,000 + VAT.

Our Peace of Mind members benefit from this service being included within their Peace of Mind membership, and therefore no additional fee will be required for them.  To find out more about the other benefits of Peace of Mind membership, contact Martin Giles at

How long does it take to complete a settlement agreement to give to my employee?

If you use our drafting checklist, we should be able to provide you with a draft settlement agreement and script for the initial employee meeting on the day you make contact with us.

Settlement agreements are usually concluded within a relatively short period of time.  If you and your employee are happy with the content and the amount of compensation which is offered then we should be able to complete the work within a matter of days.  If there are negotiations involved then it will depend how quickly each of you is able to respond, but we anticipate most agreements would be finalised within a couple of weeks.

Employers need to be aware that there is an ACAS Code of Practice in relation to settlement agreements.  Section 111A of the ERA 1996 provides that offers to end an employment relationship on agreed terms (i.e. under a settlement agreement) can be made on a confidential basis which means that they cannot be used as evidence in an unfair dismissal claim to an Employment Tribunal. For a conversation to be protected in this way it is conditional on there being no improper behaviour.  The ACAS Code provides that this includes giving an employee a reasonable period of time to consider your proposal, which will depend on the circumstances of the case.  As a general rule however, a minimum period of 10 calendar days should be allowed to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.

If you have further questions on how we can support you with settlement agreements in your business, contact us on 023 8071 7717, email or complete the form.

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