“What is a settlement agreement?” is a question more and more employers are asking, as we’ve supported countless businesses with managing people out of their organisation.
Recently, we’ve seen a growing use of settlement agreements to conclude matters in a way that enables employees to leave with dignity, while helping employers avoid lengthy internal employee relations issues.
It’s important to be clear. Settlement agreements are ultimately about bringing the employment relationship to an end. They’re designed to support an agreed exit in situations where continuing employment is no longer the best option for either party.
Managing People Isn’t Always Easy
With the ever-increasing challenges of employment legislation, the constant need to follow policy and process, and the demands placed upon us by employees with a whole new world of health conditions, life as a boss can get scary!
When things go wrong at work, the approach of brushing issues under the carpet feels like an attractive one, compared to diving into disciplinary, performance or grievance processes. If you’ve managed people, and have faced some contentious issues, you’ll have also faced the dilemma of how to deal with the situation – do you hope the matter will resolve itself, or do you jump headlong into a painful process?
There are times when faced with employee issues that you wonder if there’s a way through them without the drama and disruption that can be created by following formal, long winded internal processes to resolve them.
This is where settlement agreements come in.
Settlement agreements are powerful tools used by employers to resolve workplace issues or end employment relationships on mutually agreed terms. But when is it appropriate—or even advisable—for an employer to use one?
Let’s break down what settlement agreements are, when they can be used, and what employers should consider before offering one.
What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee (or former employee) that resolves a dispute or sets out the terms of an agreed departure. In most cases, the employee agrees not to pursue legal action (like an employment tribunal claim), and in return, usually receives some form of compensation – often a financial payment.
For the settlement agreement to be valid in law, the employee must receive independent legal advice and the terms must be clearly set out in writing.
When Do Employers Use a Settlement Agreement?
1. To Avoid a Lengthy Disciplinary or Grievance Process
Sometimes, an issue arises—like poor performance, high absence levels, misconduct, or a workplace dispute—where pursuing a formal process would be costly, time-consuming, or damaging to morale. In such cases, offering a settlement agreement can be a quicker, cleaner way to resolve the matter, especially if you believe there is little chance of seeing an improvement through following internal procedures.
2. Redundancy Situations
While not essential in redundancy cases, a settlement agreement can help ensure that an employee accepts the redundancy terms and waives any claims, such as unfair dismissal. This can be especially useful in complex or disputed redundancy processes. It also formalises the exit, providing clarity for both parties.
3. Post-Termination Negotiations
If an employee has already left the business and is considering legal action (or has started proceedings), an employer might use a settlement agreement to resolve the dispute and prevent further legal costs or reputational damage.
4. Mutual Separation
There are times when both parties agree that the working relationship has broken down or is no longer productive. A mutual parting of ways—on amicable and clearly defined terms—can be formalised through a settlement agreement.
5. Where There’s a Risk of a Tribunal Claim
Even if a claim hasn’t been brought yet, if there’s a risk that the employee could make one—such as for discrimination or constructive dismissal—a settlement agreement can be used proactively to manage that risk.
Key Considerations for Employers
- Ensure there is a genuine choice: Settlement agreements must not be offered under duress. The employee should feel they have time and freedom to consider the offer, with access to independent legal advice.
- Keep the offer “without prejudice” or under a “protected conversation”: This protects the conversation from being used as evidence in tribunal claims, assuming the offer wasn’t made improperly.
- Be clear and fair: Vague terms or unreasonable offers are unlikely to succeed. Compensation should be realistic (for both parties), and include reference to payment for working (or not working) notice periods, and legal costs.
- Tailor the agreement: Avoid a one-size-fits-all approach. The agreement should reflect the individual circumstances, including any restrictive covenants or confidentiality obligations.
How Do You Propose a Settlement Agreement to an Employee?
Settlement agreements are valuable for resolving workplace disputes, managing exits, and limiting legal risk. But timing and approach are crucial. Employers should use them carefully, ideally with legal guidance, to ensure the process is fair, effective, and legally sound.
If you’re considering using a settlement agreement in your organisation, it’s wise to seek expert HR advice early to get the best outcome for both parties. When handled well, it allows everyone to move on with clarity and dignity.
Learn more about how MYHR can support you through the process here.
