How To Negotiate A Settlement Agreement With Employers

Read on for our tips on how to approach and successfully negotiate a settlement agreement from an employer's perspective, and the key factors to keep in mind during the process. 


James Rowland

Commercial Director James leads Account Management, Sales and Marketing at Neathouse Partners.


08 November 2022


17 July 2024
4 min read

If you need to negotiate a settlement agreement when terminating an employee's contract, the goal should be to find an outcome that is beneficial and fair for all parties involved.


What Is A Settlement Agreement?

An employee settlement agreement is a legally binding contract between you and your employee that outlines the terms of the employee's departure from the company. This can include financial compensation for the employee, whilst helping to preserve company confidentiality and reputation.

A typical settlement agreement will have a confidentiality clause that stops the employee from sharing information about the company, protects the company from any legal claims by the employee, and includes a non-compete clause that prevents the employee from working for a competitor.

The agreement might also come with a severance package, which gives financial compensation to the employee in exchange for leaving their job. Settling such agreements can be complicated, so it's important to have an experienced lawyer and employment law specialist on your side to ensure that all parties are protected.


Tips For Employee Settlement Agreements

Understand What You Can Offer & What You Need In Return

Understand what you can offer the employee in terms of a settlement agreement. Consider holiday pay, non-compete clauses, pensions, confidentiality clauses, references, severance pay and other employee benefits. This will usually be based on the terms of their contract, any relevant employment law, and what you need to protect your business interests. 

Make An Opening Offer

Once you know what you can offer, you should make an initial offer to the employee. This should be in writing and should set out the terms of the agreement. It's important to be clear about what is being offered and to make sure that the offer is fair.

Be Prepared To Negotiate

Once you've made your initial offer, be prepared to negotiate with the employee. It's important to remember that the aim is to reach an agreement that is fair to both parties. Try to be flexible in your approach, and take into account the employee's needs and concerns.

Make Sure The Agreement Is In Writing

The agreement made needs to be put in writing and signed by all parties. This will ensure that both parties are clear about the terms of the agreement.

At all stages, it's important to get advice from a solicitor or HR professional to make sure you're aware of your obligations.


What Should Be Included In Employee Settlement Agreement?

A settlement agreement should include the following key things:

  • Names of the employer and employee
  • The date of the separation
  • The reason for the separation
  • A non-disclosure agreement, if applicable
  • A non-compete clause, if applicable
  • A release of all claims against the company
  • Details on severance pay and benefits including holiday pay, pensions, bonus payments, shares etc.
  • Any other relevant terms and conditions
  • The signature of the employer and employee

By including the relevant information, you can help to prevent future legal issues and make sure everyone is on the same page.


When Are Settlement Agreements Needed At Work?

When are settlement agreements needed at work

The settlement agreement is a legally binding contract between an employer and employee that outlines the terms of their separation and is typically used when an employer wants to terminate an employee's employment but does not want to go through the hassle or expense of a formal termination process. They can be used to settle employment disputes and can cover a wide range of issues such as unfair dismissal, breach of contract, and discrimination.

There are a few situations where a settlement agreement may be needed at work:

When an employee has been accused of misconduct

If an employee has been accused of misconduct or wrongdoing, they may be asked to sign a settlement agreement to avoid being formally terminated. This protects both sides from potential legal repercussions.

When an employee is being laid off

If an employee is being laid off, they may be asked to sign a settlement agreement to receive severance pay. One common scenario is when an employee is being let go due to company downsizing or restructuring. In this case, the employer may offer the employee a severance package that includes a settlement agreement.

When an employee is quitting

If an employee is quitting, they may be asked to sign a settlement agreement to waive their right to bring legal claims against the company or discuss the company’s operating practices with outside parties.

When an employee is being fired 

If an employee is being fired, they may be asked to sign a settlement agreement to receive severance pay.

When an employer wants to avoid a lawsuit

If you are worried that an employee may file a lawsuit, you can ask an employee to sign a settlement agreement to avoid this.


Employer Damage Liability

You may become liable for damages if the employee can prove that you have breached the settlement agreement made. The most common way that an employer can breach a settlement agreement is by failing to pay the agreed-upon amount on time.

If the employee can prove that you failed to make the required payments, they may be able to sue for breach of contract. Additionally, you could also be held liable for damages if you violate the terms of the agreement in any way.

For example, if you have agreed to pay an employee severance pay but then terminate their employment before they are eligible to receive the severance pay, the employee may be able to sue for breach of contract.

To avoid liability for damages, it's important to take legal advice and fully understand the terms of the settlement agreement before signing it.


Benefits Of Settlement Agreements For Employers

The key benefit of having a well-drafted settlement agreement in place is that it provides clarity and certainty for both parties, and can avoid the need for costly and time-consuming legal proceedings.

A Well-drafted settlement agreement can:

  • help to avoid costly and time-consuming litigation.
  • help resolve disputes quickly and efficiently.
  • protect your business interests, such as trade secrets or confidential information.
  • aid the preservation of relationships with employees and avoid bad publicity.



An employee settlement agreement is an important, legally binding document that can help protect both the employer and the employee when contracts are terminated. They can help to resolve disputes quickly and without the need for costly and time-consuming litigation. As such, they can offer a win-win solution for both employers and employees.

The tips outlined in this article will ensure you maximise your chances of a successful outcome and reduce damage liability when negotiating a settlement agreement with employees.


Next Steps

If you would like support with managing settlement agreements and understanding your employer's responsibilities when terminating contracts with your employees, please contact us.

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