Settlement Agreements : Guide to the process of negotiation

Scope of this Guide

This guide sets out how the process of negotiation is likely to work when the employer and employee are exploring the possibility of entering into a settlement agreement.  The focus is on discussions taking place before the employment has terminated.

A settlement agreement is a legal document which deals with the termination of employment on agreed terms.  When negotiating such an agreement, it is usual to specify that all communications should be treated as “without prejudice” and “subject to contract”.  This means that the parties can speak freely in negotiations and anything said cannot be used against them in evidence should negotiations break down and a formal claim is brought in the employment tribunal.  It also means that neither party is legally bound by anything discussed or apparently agreed in negotiations until a final written agreement is actually signed.

We have a settlement agreement calculator which indicates what you could be entitled to. 

Why are negotiations opened?

An employer may want to propose a termination of employment on mutually agreed terms before there is any actual dispute with the employee.  Likewise, an employee may wish to suggest a settlement.  The employer may have a number of reasons and these will include perceived shortcomings in the employee’s performance, organisational changes or simply a clash of personalities.  Rather than going through capability, redundancy or disciplinary proceedings with the risk of litigation and possible negative publicity, it is often seen by the employer as commercially beneficial to start confidential exit negotiations with a view to a financial settlement.

The employee may wish to start negotiations if he or she feels that their position in the business is no longer secure or they feel threatened or bullied or harassed.  Quite often, the employee may have been off sick for a period of time and simply does not wish to return.  They may have lodged a formal grievance which would normally result in lengthy investigations and meetings when in actual fact, the employee simply wishes to leave but does not wish to walk away with nothing.

Common scenarios

Typically, the process of negotiation takes place in one of four scenarios.

  1. Where employment has already ended

The employee may be presented with a draft settlement agreement (marked “without prejudice and subject to contract”) and asked to take advice and revert to the employer within a fairly short timescale.  Although it is a draconian and risky step, employers sometimes dismiss employees with immediate effect (or with a payment in lieu of notice) at the same time as handing them a draft settlement agreement with a deadline within which to respond.

This is common in certain industries (for example, financial services) where the risks of keeping a discontented or potential disreputable employee in employment while negotiations are conducted are seen as too great.  In such situations, the employer will usually have decided that the litigation risks (of claims for unfair dismissal) are smaller than the other commercial risks.  In our experience, this often occurs in cases where the employer has already made up its mind to dismiss the employee and recognises that there will be a price to pay and will usually have factored in the enhanced bargaining position this gives the employee during negotiations.

It is a calculated risk but more often than not, a settlement agreement is concluded because this is  almost always preferable to embarking upon costly and protracted litigation in the employment tribunal.

  1. Where employment and active duties continue

Here, the employee may be approached by their manager or human resources department and made an offer and given a draft settlement agreement.  They are told to take it away and consider its contents and respond within a timescale.  The employee may remain in the workplace, actively carrying out their duties but asked to keep the discussions confidential including the fact that they have actually been given a draft agreement.

On the whole, this approach is more likely to be used where the situation between the parties is not too acrimonious and the relationship has not broken down.  It might be used, for example, where there is a likely redundancy situation or where there are ongoing performance issues which the employer does not wish to deal with on a formal basis.

  1. Where the employment continues but the employee is not carrying out any duties.

This may be arise where the employee is already on long term sick leave.  Again, a draft agreement is presented and the employee is asked to respond.  A longer timescale may be given because the situation is likely to be less immediately awkward where the parties are not interacting on a day to day basis.  It is not uncommon for an  employee who has lodged a grievance to go on long term sick leave creating a “no win” situation for both parties in which the relationship seems to have little prospect of returning to normal.  These negotiations need to be conducted with care and sensitivity having regard to the employee’s health and possible disability issues.  For example, a meeting off-site or at the employee’s home may be suggested.

  1. Where the employment continues but the employee is sent home.

Here, the employee may be placed on garden leave or simply be told that it is better for them to remain at home whilst they consider the position.  They will often also be asked not to have contact with colleagues or clients and their computer access may be disabled.  Where the employment has not been terminated, the employer runs the risk of creating a hostile situation in which it may be difficult for the employee to envisage returning to active duties.  Again, this approach is often used where the employer has already made up its mind that there must be a parting of the ways.

Possible steps in a settlement discussion (employee still employed)

Step 1 : invitation to meeting

The employer simply invites the employee to a meeting at a mutually convenient time and place.  In most cases, the employer will not wish to notify the employee in advance that the purpose of the meeting is to discuss settlement.  It may on the other hand be appropriate to refer to the underlying issue which has led the employer to make the offer and indicate that it is an informal discussion of that issue.

Step 2 : at the meeting

The employer may explain its concerns (for example, performance issues or possible disciplinary proceedings, or a breakdown in the working relationship) in a neutral manner and propose an exit with an agreed settlement package.  The employer should provide enough information for the employee to understand what has led to the offer and the potential consequences if they do not leave.  There is a balance to be struck and employers should be cautious about providing excessive or detailed information as doing so could suggest that the outcome has been predetermined.  It may also lead the employee to focus on defending the accusations rather than considering the settlement offer.

It is good practice for the employer to highlight that settlement discussions are expected to be inadmissible in any proceedings and that they will have no bearing on any subsequent performance management or disciplinary procedures.  However in practice, once the lid has been lifted on settlement discussions, it is often very difficult to retrieve the situation and for the employment relationship to continue as normal if a settlement is not in fact reached.

Step 3 : written offer

If the employee agrees to explore the suggestion of settlement, the employer will then produce a written offer.  This may be the actual agreement itself or simply a letter outlining the principal terms.  It will also state that the employee must take legal advice on the whole package and in the vast majority of cases, the employer will offer to pay a fixed contribution towards the employee’s legal fees.  This is in our experience typically between £250 and £500 plus VAT.  Good practice and indeed the Acas code of practice on settlement agreements suggest that an employee should as a general rule, be allowed 10 calendar days to consider the proposal.  However, this is not set in stone and the parties may agree a shorter or longer period.

Step 4 :  settlement agreement

If they have not already done so, the employer will then provide the formal agreement and the employee will need to take independent legal advice.  If the employee is not interested in exploring settlement, the employer should cease negotiations and seek to tackle the underlying problem.

Timing of negotiations

Where the employment has already ended, the fact that settlement negotiations are taking place does not alter the normal time limits for raising complaints.  This means that employees and their advisers should ensure that negotiations are complete and the settlement agreement signed prior to the last date for commencing proceedings or Early Conciliation.  This is within 3 months of the date of termination of employment.  This time limit is strict and employees should be careful to ensure that any deadline is not missed.

It is also in the employer’s interest to resolve matters fully well in advance of the time bar date in order to avoid further costs if the employee seeks to negotiate an increase in compensation or contribution towards legal fees if proceedings have already been issued.  Employers may also find that the employee’s position hardens and discussions become more challenging once the employee has taken the step of lodging a formal claim.  Therefore, both parties and their advisers should note the relevant time bar dates at the outset of any negotiation if the employment has already ended.

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