Settlement agreements: 5 top strategies and tips for employers


 With Brexit continuing to cause economic uncertainty in the UK, it is inevitable that some employers are now looking at re-organising and reducing staffing levels. As part of this process businesses often offer departing employees a settlement agreement as a means of protecting themselves from potential litigation arising out of the employees’ employment and its termination.

A settlement agreement (previously called a compromise agreement) is a legally binding confidential agreement between an employer and employee. A severance payment is typically given in return for the employee’s agreement not to pursue any employment tribunal or civil courts claims arising from their employment or its termination. A settlement agreement can also provide an opportunity for employers to secure additional protection in relation to its business needs in the context of the employee’s future business activities, including reaffirming post-termination restrictions and duties of confidentiality, while preventing employees from bad-mouthing their ex-employer.

At iLaw, we have over 20 years’ experience putting together commercially focused and robustly drafted settlement agreements on behalf of employers.

Here are our top 5 strategies for using settlement agreements based on our skills and expertise in this area:

1. Settlement agreements are a useful tool when an employer is faced with insurmountable workplace issues surrounding a particular employee

Settlement agreements are a particularly effective tool for employers where they cannot see a way forward in terms of an employee’s continuing employment but resolving the situation presents challenges. For example, where it may be difficult to justify a particular redundancy. Work performance procedures can take months to follow involving having to give a series of warnings before any decision can be taken to dismiss. Settlement agreements are particularly useful in such circumstances because they offer employers a quick and clean method of terminating someone’s employment without having to undertake a long and difficult redundancy, disciplinary or capability process, which usually involves substantial management time.

2. Make sure to pitch any financial settlement under a settlement agreement a commercially appropriate level.

There is no prescribed sum an employer should offer an employee under the auspices of a settlement agreement. The amount will very much depend on the reasons why the employer wants to terminate the employee’s contract of employment, the terms and conditions in the employee’s contract of employment and the likely value of any potential claims they may have arising out of their employment and its termination.

As an employer you are effectively compensating the employee for terminating their employment and not filing an employment tribunal claim. For employees with over two years’ employment you ought to be aware this gives them sufficient continuity of employment to claim unfair dismissal. Even if they can’t fulfil the service requirement for unfair dismissal depending on the background to the dispute they may have a claim for discrimination which needs to be compromised out of.

At the same time as considering making an ex gratia payment to the employee, employers need to ensure that all contractual entitlements (e.g. notice or payment in lieu, holiday entitlement, commission, bonus etc.) are taken care of as part of the settlement.

It’s wise to ensure professional legal advice is obtained and the appropriate settlement amount is carefully calculated based on this before pitching such an offer.

3. Make sure the Employer’s cost contribution is appropriate

 For a settlement agreement to be legally binding as a matter of law, the employee has to take independent advice as to its terms and effect.

Given that, by signing the settlement agreement, the employee is effectively compromising out of any claims they may have arising out of their employment and the termination thereof, it is conventional that the employer pays a contribution towards the legal costs of the employee seeking that advice.

It is important that the cost contribution is sufficient to allow the employee to take considered legal advice regarding the meaning and effect of the settlement agreement.

As an employer, you don’t want to make the contribution too high though so as to encourage the employee to instruct the lawyer to create arguments to try to negotiate a higher settlement figure on their behalf. If you do, you are running the risk of effectively giving the employee the bullets to fire the gun so to speak. Depending on the employment sector in which your business operates, its geographical location and the employee’s level of seniority within the organization, a cost contribution of between £250-500 plus VAT. In some rare cases, employers might not offer any contribution at all, for example, where there are strong grounds to dismiss the employee if they won’t sign the agreement.

4. Ensure any post termination obligations are properly catered for under the settlement agreement

In the case of senior employees and sales staff there may be a concern, with them exiting the business, that they may cause it damage commercially in terms of joining a competitor or trying to poach clients or key employees away from the organisation. If you have identified there is a risk of the business’s legitimate business interests being harmed in this way and they have post termination provisions written into their contracts of employment then it is recommended to refer to these restrictions in the settlement agreement also and make it clear the employee is expected to adhere to these obligations. The same goes for maintaining confidentiality and intellectual property rights. Where the employee does not have any such restrictions contained in their contract of employment then the settlement agreement provides an opportunity to write these in. The employee may seek further compensation in return for agreeing to any such post termination restrictions though as they may represent a fetter on their ability to obtain alternative employment in the short to medium term.

5. Give an appropriately focused time limit for signature of the settlement agreement

It is important that settlement negotiations remain focused. You may therefore want to suggest a defined period for consideration and return of the agreement including the Adviser’s Certificate. The Acas Code of Practice on settlement agreements suggests (and it is just that, a suggestion) a period of a minimum of 10 calendar days for the employee to consider the agreement. That ought to be more than sufficient in the circumstances. Many employers state that the offer is open for acceptance for a defined period after which it will be withdrawn. This tends to help focus the mind of the employee.

We hope this article has been useful. If your business is considering offering an employee (or a number of employees even) a settlement agreement we would be very happy to talk to you about strategy generally and how to tailor the agreement(s) to your organisation’s business needs. Please call the author of this article, Julian Cox who heads iLaw’s employment team to discuss on 0207 489 2059 or e mail him at