Settlement Agreements
Sometimes the best outcome for everyone is a clean break. We draft, negotiate, and manage settlement agreements that protect your business, treat your employee fairly, and get the matter resolved quickly.
What Is a Settlement Agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between an employer and an employee. In exchange for a financial payment, the employee agrees to waive their right to bring certain claims against the employer, such as unfair dismissal, discrimination, or breach of contract. The employment relationship usually ends as part of the agreement, though settlement agreements can also be used to resolve an ongoing dispute while the employee remains in their role.
Settlement agreements are one of the most practical tools available to employers. They allow you to bring a difficult employment situation to a definitive close, with certainty for both sides. Without one, even if you follow the correct dismissal process, the employee can still bring a tribunal claim. A well-drafted settlement agreement removes that risk entirely. They are commonly used at the end of a performance management process, during a redundancy situation, to resolve a grievance or workplace dispute, or where the employment relationship has simply broken down.
At Rebox HR, we manage the entire settlement agreement process on your behalf. That includes advising on whether a settlement agreement is the right approach, coaching you through the initial protected conversation, drafting the agreement itself, advising on the financial package, and managing negotiations if the employee or their solicitor pushes back on terms. We also coordinate the practical details like the employee's independent legal advice requirement, reference wording, and exit communications to the wider team.
What We Cover
Practical, expert support across every aspect of settlement agreements for your business.
Protected Conversations
The first step in most settlement agreement processes is the protected conversation. Under section 111A of the Employment Rights Act 1996, you can have an off-the-record discussion with an employee about ending the employment relationship, and the conversation cannot be used against you at tribunal (provided there is no improper behaviour). We coach you on exactly what to say, how to frame the offer, and what to avoid. Many employers get this wrong by being too vague, too aggressive, or by putting things in writing too early. We make sure the conversation is handled properly from the start.
Agreement Drafting
We draft the settlement agreement from scratch, tailored to your specific situation. Every agreement we produce covers the key commercial clauses: the termination date, the settlement sum and how it is structured, a comprehensive waiver of claims, confidentiality obligations, non-derogatory statements from both sides, an agreed reference, and the return of company property. We also include any restrictive covenants or post-termination obligations that are important to your business. Our agreements are clear, professional, and designed to be accepted without lengthy legal back-and-forth.
Financial Structuring
How a settlement payment is structured matters. The first £30,000 of a genuine termination payment can be paid tax-free under section 401 of the Income Tax (Earnings and Pensions) Act 2003, but payments for notice periods, holiday pay, and bonuses are taxable in the normal way. We advise on how to structure the package to make the most of the tax-free allowance while staying within HMRC rules. Getting this wrong can mean unexpected tax bills for the employee or compliance issues for your business.
Negotiation Management
Once the employee receives the agreement, they are required to take independent legal advice from a solicitor or certified trade union official. It is common for the employee's adviser to come back with counter-proposals on the settlement sum, reference wording, or restrictive covenants. We manage this negotiation process on your behalf, advising on which requests are reasonable, where to hold firm, and how to reach a final agreement without the process dragging on. Most settlement agreements we handle are agreed within two to three weeks.
Manager Coaching
The protected conversation is often the most nerve-wracking part of the process for managers. We offer one-to-one coaching beforehand, running through the conversation, preparing answers to likely questions, and building the manager's confidence. If you prefer, we can attend the meeting alongside the manager or conduct the conversation on your behalf. We also support managers in handling the period between the offer and the employee's departure, including managing workload handover and communications with the rest of the team.
Exit Management
A settlement agreement is not just a document. It is an exit process that needs managing carefully. We advise on the practical details: when the employee's last working day should be, whether they should be placed on garden leave during the notice period, how to handle the announcement to the team, what to say if clients or customers ask, and how to manage the handover of work. We also ensure the agreed reference is saved on file so it is used consistently in the future.
How We Help
A clear, structured approach from start to finish.
Strategy
You call us to discuss the situation. We assess whether a settlement agreement is the right approach, advise on the likely cost, and plan the protected conversation. We coach the manager who will deliver the message and prepare the key talking points. This initial consultation is free and confidential.
Offer and Drafting
The manager has the protected conversation with the employee (with our support). If the employee is open to the idea, we draft the settlement agreement and send it to the employee with a covering letter explaining the process, including the requirement to seek independent legal advice. We typically recommend giving the employee at least 10 calendar days to consider the offer.
Agreement and Exit
We manage any negotiation with the employee's solicitor, agree final terms, and ensure both parties sign. We handle the practical exit arrangements including garden leave, handover, reference wording, and team communications. Once the agreement is signed, the matter is closed and the employee's claims are waived.
Frequently Asked Questions
What is the difference between a settlement agreement and a compromise agreement?
They are the same thing. Settlement agreements were previously called compromise agreements. The name was changed in July 2013 under the Enterprise and Regulatory Reform Act 2013, at the same time as the introduction of protected conversations under section 111A of the Employment Rights Act 1996. If you have old template agreements that still use the term 'compromise agreement', they should be updated.
How much should I offer in a settlement agreement?
There is no fixed formula, and the right figure depends on the circumstances. Factors we consider include the employee's length of service, their salary and benefits, the strength of any potential claims they could bring (such as unfair dismissal or discrimination), the cost of continuing with a formal process, and what a tribunal might award if the case went to a hearing. As a rough guide, many straightforward settlements fall in the range of two to six months' salary, but complex situations or strong claims can be higher. We advise on an appropriate figure for your specific situation, balancing risk with cost.
Does the employee have to get legal advice?
Yes. For a settlement agreement to be legally valid under section 203 of the Employment Rights Act 1996, the employee must receive independent legal advice from a relevant independent adviser, most commonly a solicitor. The adviser must be identified by name in the agreement and must have professional indemnity insurance. It is standard practice for the employer to contribute towards the employee's legal fees, typically between £350 and £500 plus VAT. This cost is worth it because without independent legal advice, the agreement is not enforceable and the employee can still bring a claim.
What if the employee refuses to sign?
An employee cannot be forced to sign a settlement agreement. If they decline the offer, you need to consider your options. If there is an underlying process (such as a redundancy consultation, performance management plan, or disciplinary), you can continue with that process. If the employment relationship has simply broken down, you may need to manage the situation through other formal routes. We help you plan for this outcome before the protected conversation takes place, so you are not caught off guard if the employee says no.
Can a settlement agreement be used during a disciplinary process?
Yes, and this is very common. If you are partway through a disciplinary or performance management process and both parties would benefit from a clean exit rather than a protracted procedure, a settlement agreement can bring the matter to a swift close. The disciplinary process is typically paused while settlement discussions take place. If an agreement is reached, the process does not need to resume. If not, the formal process continues. We advise on the timing and approach to make sure this is handled correctly.
What is a protected conversation?
A protected conversation, introduced by section 111A of the Employment Rights Act 1996, allows an employer to have a confidential discussion with an employee about ending the employment relationship without the conversation being used as evidence in an unfair dismissal claim at tribunal. This protection does not apply to discrimination claims, whistleblowing, or where there has been improper behaviour (such as undue pressure or threats). We coach managers on how to conduct protected conversations properly, because getting the tone or content wrong can mean the protection is lost.
How long does the settlement agreement process take?
From the initial protected conversation to a signed agreement, the process typically takes two to four weeks. The ACAS Code of Practice on Settlement Agreements recommends giving the employee at least 10 calendar days to consider the offer, though this can be shorter or longer depending on the circumstances. If the employee's solicitor raises counter-proposals, the negotiation stage may add a few extra days. We keep the process moving and aim to avoid unnecessary delays on either side.
Is the first £30,000 really tax-free?
The first £30,000 of a genuine termination payment can be paid free of income tax under section 401 of the Income Tax (Earnings and Pensions) Act 2003. However, this only applies to compensation for loss of employment. Payments that represent notice pay (including pay in lieu of notice), holiday pay, bonuses, or contractual benefits are taxable as earnings in the normal way. Since April 2020, employer National Insurance contributions are also due on termination payments above £30,000. We structure every settlement agreement to make the most of the tax-free allowance while complying with HMRC rules.
“I cannot emphasise enough how fortunate I feel to have such an incredible HR team supporting us every step of the way. Knowing they are just on the end of the phone has given us complete peace of mind.”
Related Services
Dismissals
When dismissal is the outcome, we ensure the process is legally sound and fully documented, whether it leads to a settlement or a formal termination.
Dismissals →Ad-Hoc HR Services
Pay-as-you-go HR support when you need expert guidance for a specific situation without a monthly retainer.
Ad-Hoc HR Services →Retained HR Support
Ongoing expert HR support with a fixed monthly fee. Includes advice on settlement agreements as situations arise.
Retained HR Support →Need Help With a Settlement Agreement?
Whether you are considering offering a settlement or have already started discussions, we can take it from here. Book a free, confidential consultation and let us manage the process for you.
Book Your Free ConsultationOr call us directly on 01327 640070