What is a Settlement Agreement?

Written by Martha Mitchell
22 September, 2020
What is a settlement agreement?

Sometimes the relationship between you and an employee simply breaks down. How do you end that relationship? There are only 5️ potentially fair reasons to end the employment of an employee with over 2 years service and a simple breakdown in a relationship is not one of them (unless in some very specific circumstances).

A Settlement Agreement is a way to end the employment without having to dismiss the employee for one of the five reasons and it’s often a good opportunity to avoid unnecessary fall-out.

The employee is then prohibited from issuing any legal proceedings against you (the employer). This was previously referred to as a Compromise Agreement.

Under section 111A Employment Rights Act 1996 you can have a conversation with an employee looking to agree terms to end their employment. It should be a genuine attempt to enter into pre-termination negotiations.

The Offer

Your offer should include a proposed date to end the employment relationship.

You must make a financial offer to the employee. You must pay the employee their notice pay (or ask them to work it) and any accrued but untaken annual leave – these payments are subject to deductions for tax and NI.

In order to incentivise the employee to sign the agreement and end their employment, an ex-gratia payment should be made. In most cases, employers offer a similar amount to a redundancy payment, but it is a matter for negotiation.

The Benefit

If you are not able to dismiss for one of the five potentially fair reasons, or decide not to follow a formal process, a settlement agreement can be of huge help to employers.  It’s often a quicker way to reach your desired goal of ending the employment.

As part of the agreement the employee confirms that they will not bring a claim in the Employment Tribunal against the employer.

Legal Advice

The only downside for employers is that an employee must receive independent legal advice. You, as the person who commenced the negotiations, must contribute to their legal fees. This is usually around £250-£350+VAT although this will be more in the London areas.


Conversations which are a genuine attempt at pre-termination negotiations cannot be used as evidence if no settlement is reached and the employee is later dismissed or resigns. The conversation can be used as evidence in discrimination claims so we recommend that you take advice before entering into negotiations.

Next Steps

If you find yourself in this situation with a current employee or will conduct a Settlement Agreement in the future, please get in touch for our Legal Advice.

Email: [email protected] or simply call us on 01270781006

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