Dismissing an employee can be challenging, as legal procedures can be lengthy and complex. However, a settlement agreement offers a faster and more straightforward solution.
A settlement agreement is a formal contract that provides a clear and structured way to part company with an employee—though it can sometimes be costly. In this agreement, the employer offers a financial settlement, and in return, the employee agrees not to pursue any legal claims against the company.
Previously referred to as compromise agreements, settlement agreements can be utilised at any stage of the employment relationship. They are particularly useful in cases where an employee may not be suitable for their role but is likely to contest dismissal.
The aim of a settlement agreement is to part company quickly, whilst taking away the employee’s ability to sue you at employment tribunal, for almost anything related to their employment.
Employers typically use settlement agreements for various reasons, including:
The financial terms of a settlement agreement vary, and while an employer can offer any amount, the employee is under no obligation to accept it. Therefore, it is essential to make a reasonable and persuasive offer. A typical settlement package includes:
The ex-gratia payment is often based on statutory redundancy entitlements as a starting point for negotiations. For example, an employee aged 40 with 12 years of service would typically receive 12 weeks’ notice and applicable holiday pay, with an initial ex-gratia offer calculated around £7716 tax-free.
However, the final amount should be a strategic business decision rather than a purely legal one, factoring in potential litigation costs, reputational risks, and the broader commercial impact.
Employers are required to cover the cost of independent legal advice for the employee to ensure the validity of the agreement. Typically, this cost ranges between £500 and £650 plus VAT and this is paid directly to the solicitor.
It is important to note that an employee cannot lawfully waive their right to legal advice. An agreement signed without proper legal consultation is invalid and unenforceable.
The first step is to engage in a “without prejudice” or “protected” conversation, which ensures that discussions remain confidential and cannot be used as evidence in legal proceedings. However, the employee is not obligated to participate and the correct procedure must be followed.
During this conversation, the employer should outline the financial terms of the settlement. Observing the employee’s reaction can provide insight into their willingness to negotiate. While initial agreement may be secured verbally, the employee may later request adjustments, which is a normal part of the process.
Once terms are agreed upon, the employer should provide a formal settlement agreement for review. This document should comprehensively detail the financial package and the employee’s waiver of claims.
We can help with the initial protected conversations, calculate the figures and we can also draft the settlement agreement for you, alongside conducting negotiations. Providing you will all the support that you need, we are just at the end of the phone.
