How to negotiate a settlement agreement

Do it right, for your business

First published on Thursday, Jun 04, 2020

Last updated on Tuesday, Jun 25, 2024

When a relationship with an employee goes wrong, and you can’t find a way forward together through mediation, a settlement agreement is often the best answer. It’s a voluntary, legally binding contract that ends a dispute — or it can end the employment relationship altogether.

In a settlement agreement, your employee usually waives their right to make a financial claim (e.g. at tribunal, or in court) in exchange for an immediate payment from your organisation.

Reaching such an agreement usually requires quite a bit of negotiation. Here’s what you need to know.

Before you start…

It’s worth remembering that Acas advises against excessive use of settlement agreements, because they can damage wider employee relations if used heavy-handedly. Make sure you’ve exhausted other options, like discussion and your organisation’s formal procedures, first.

Negotiations begin with your initial offer

A settlement agreement is usually first proposed by you, the employer. This means you can state your negotiation position first. In your written or verbal proposal, you should be clear about why you want to settle and what you are offering.

Your initial financial offer should consider:

  • Potential costs to your company of resolving the problem without a settlement agreement
  • The cost of keeping the employee on, or ending their contract — consider their pay, notice period, unspent annual leave, and their length of service
  • Your reasons for offering the settlement

Your settlement offer might also include a reference for the employee, to reduce the impact of their departure by helping them find a new job more easily.

When you should take legal advice

Your settlement offer should be attractive enough to sway the employee from making another kind of financial claim. But it should also work for your organisation. If you aren’t sure how much to offer, consider taking advice from an experienced solicitor.

The Acas-approved negotiation process

Once you’ve made your initial offer, it’s time for negotiations to really begin. It’s advisable to follow the following process suggested by Acas, because if you can’t agree a settlement the next step could be an employment tribunal.

1. Let the employee consider your offer

Give the employee at least 10 calendar days to consider your initial offer before you contact them again.

2. Meet with the employee

After those 10 days are up, you should arrange to to meet with the employee to discuss the offer. Make sure you prepare well: be very clear on the reasons behind your offer and be ready to answer questions about them.

You should allow the employee to be accompanied by their solicitor, a trade union rep or a colleague.

3. Leave your emotions at the door

The dispute that led to your settlement negotiations is likely to have some negative emotions attached to it. But it’s vital to keep your approach professional and dispassionate. You should also be sensitive towards your employee’s feelings, and the issues discussed.

Remember, your goal is to reach a mutual agreement. You’ll get there more easily if you can discuss matters respectfully.

4. Know the value of your offer

The employee may respond to your initial offer with their own set of demands — most likely, a request for a larger financial payment. It’s at this point that you need to be confident that your own offer:

reflects the amount a tribunal or court may expect you to pay, with adjustments that account for the convenience and lack of risk of a settlement agreement
is reasonable and fair to both parties
If the employee introduces new arguments you had not considered when making your offer, take your time and weigh the strengths of your position before making a counter-offer.

5. Hammer out the details

Make sure you include details such as payment arrangement and timings in your agreement.

And if you’re ending the relationship, the reason doesn’t have to be dismissal. You could also agree to part ways ‘by mutual agreement.’

Lucy Cobb

Employment Law Specialist

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