Settlement agreements: what employers must get right before making an offer

Use a settlement agreement for a defined outcome

A settlement agreement is a voluntary, legally binding contract. The individual agrees not to pursue specified employment claims, usually in return for payment and other agreed terms. It can end employment, settle a live dispute while employment continues or record an agreed solution such as a bonus payment.

It is not a dismissal procedure and the employee does not have to accept. Before proposing one, identify the business problem, the possible claims, the desired end date and what happens if no agreement is reached. A North East employer dealing with capability, conduct, redundancy or a relationship breakdown should still understand the fair underlying process rather than treating settlement as a substitute for management.

Anyone can suggest an agreement. The opening explanation should be accurate and measured: why the option is being raised, what is proposed and that negotiation is permitted. Do not describe an unsigned offer as a decided outcome.

Acas: using settlement agreements ↗

Meet every condition for a valid agreement

Calling a document a settlement agreement does not make the waiver effective. It must be in writing and relate to the particular complaint or proceedings being settled. The individual must receive advice from a relevant independent adviser on the agreement and its effect on their ability to pursue the claims.

The adviser must be identified in the agreement and have the required insurance or indemnity cover. The document must state that the statutory conditions regulating settlement agreements have been satisfied. Acas warns that a bare statement settling 'all claims' is not enough; the particular claims covered must be identified.

The independent adviser may be a qualified lawyer, an appropriately certified trade union adviser or an appropriately certified advice-centre worker. The employer should consider contributing to advice costs, although Acas confirms there is no general requirement to do so. The employer should obtain its own advice where the facts, claims, tax or drafting are not straightforward.

Employment Rights Act 1996, section 203 ↗ · Acas: making a formal offer ↗

Do not assume every discussion is protected

The phrases 'protected conversation' and 'without prejudice' are often used too casually. Without-prejudice protection normally requires an existing dispute, a genuine attempt to settle it and no unambiguous impropriety. A grievance or unexpected offer does not automatically establish an existing legal dispute.

Section 111A of the Employment Rights Act can protect pre-termination negotiations even without an existing dispute, but its scope is limited. It generally concerns ordinary unfair-dismissal and some constructive-dismissal claims. It does not provide blanket protection for discrimination, wrongful dismissal, unlawful wage deductions or automatically unfair reasons such as whistleblowing.

Protection may also be lost where there is improper behaviour. Acas examples include bullying, intimidation, discrimination, victimisation, inadequate time and telling somebody before a disciplinary process that they will be dismissed if they reject the offer. Plan on the basis that careful conduct matters more than a 'without prejudice' heading.

Acas: confidentiality in settlement discussions ↗ · Employment Rights Act 1996, section 111A ↗ · Related guide: whistleblowing at work →

Give proper time and a fair meeting

Explain the reasons and proposed terms at a private meeting, answer reasonable questions and confirm that the offer is voluntary. There is no general statutory right to be accompanied at a settlement meeting, but Acas describes allowing a colleague or suitable trade union representative as good practice. Reasonable adjustments may require other support for a disabled person.

Put the formal offer in writing and allow reasonable time for consideration and independent advice. The Acas Code recommends at least 10 calendar days unless the parties agree otherwise. Ten days is a minimum planning benchmark, not an automatic deadline for every case; disability-related needs, document complexity or adviser availability may justify longer.

Avoid artificial urgency. A manager can explain the likely lawful alternative, such as continuing a capability or disciplinary process. They should not say that rejection itself guarantees dismissal. Keep the existing procedure separate and make decisions on its evidence if negotiations fail.

Acas Code of Practice on settlement agreements ↗ · Related guide: workplace investigation process →

Break the money into the correct components

Set out salary, holiday pay, bonus or commission, notice arrangements, redundancy pay where relevant, compensation, benefits, expenses and the proposed payment date. This lets both sides understand what is already owed and what is being offered in return for the waiver.

Do not promise that the first £30,000 of every settlement is tax-free. GOV.UK confirms that wages, holiday pay, bonuses and notice-related amounts are normally subject to tax and National Insurance. The first combined £30,000 of qualifying statutory redundancy and additional severance payments may usually be tax-free, while the employer pays Class 1A National Insurance on the excess.

Post-employment notice pay rules can tax part of a termination payment even where the agreement describes it as compensation. Obtain payroll, tax or legal input where treatment is uncertain, and draft the agreement to explain deductions rather than giving an unsupported guarantee.

GOV.UK: tax on termination payments ↗

Draft the practical exit, not only the payment

Record the termination date, notice or garden leave, handover, property return, access to systems, expenses, benefits and when the final payment and P45 will be provided. If a reference is agreed, attach its wording and identify who may issue it. This prevents a later verbal reference from undermining the bargain.

Confidentiality wording should define what is protected and the permitted disclosures. It cannot lawfully prevent whistleblowing or reporting a crime to the police. Acas also warns against routine clauses that conceal misconduct or stop somebody obtaining advice. Use proportionate wording for the real business interest rather than a blanket instruction never to discuss what happened.

Consider mutual non-derogatory wording, announcements to colleagues and clients, restrictive covenants and who pays the adviser. Existing restrictions should not simply be copied without checking whether they remain relevant and enforceable after the agreed exit.

Acas: using non-disclosure agreements ↗ · Related guide: employment references →

Continue fairly if the offer is rejected

Rejection leaves the employment relationship and underlying issue to be managed. Do not punish the employee, withdraw ordinary opportunities or manufacture evidence because they declined. Return to the appropriate route: mediation, grievance resolution, performance support, disciplinary procedure, redundancy consultation or another fair process.

Keep negotiation material appropriately restricted. Managers running the underlying process should make evidence-based decisions and avoid treating willingness to settle as an admission. If circumstances change, a revised offer can be considered, but repeated pressure may become improper behaviour.

A signed agreement creates contractual obligations. Missed payments, an unauthorised reference or breach of an enforceable confidentiality term can lead to a contract claim. Assign owners and dates for every post-signature action instead of filing the document and assuming the matter is finished.

Ten-point employer checklist

Before the first meeting, test the proposal from both directions. Could the business explain why the offer is reasonable, and could it continue a fair process if the employee says no? If either answer is unclear, the discussion is not ready.

• Define the problem, possible claims and lawful alternative process.
• Check who has authority to propose and approve the package.
• Explain that the discussion and agreement are voluntary.
• Assess whether section 111A or without-prejudice protection actually applies.
• Avoid pressure, discrimination, threats and predetermined dismissal language.
• Issue written terms that identify the specific claims being settled.
• Allow at least the Acas-recommended consideration period, adjusted where needed.
• Require advice from an eligible, independent and insured adviser.
• Separate taxable earnings, notice pay and potential tax-free compensation.
• Plan the reference, communications, payments and procedure if no deal is reached.