Settlement agreements are a useful means of settling disputes and terminating employment on mutual terms, mitigating the risk of claims.
We outline below how employers can negotiate a settlement agreement confidently and the main issues that need to be considered.
When to negotiate a settlement agreement
You may wish to negotiate a settlement agreement if an individual poses a threat to the business and you want to mitigate the risk of claims, or they have considerable influence and you wish to keep them on side.
You would not generally seek to negotiate a settlement agreement when you are making several employees redundant.
In this situation, redundancy pay will be calculated using a formula so you can offer it without any room with negotiation, provided you have followed a fair selection and consultation process.
How to negotiate A Settlement Agreement
All employers adopt an individual negotiating technique, but generally being firm yet receptive is the best approach.
The negotiation process can be stressful, particularly when it follows disagreement and pre-existing issues.
However, it is essential that the employer remains calm and level-headed to make the process as smooth as possible.
Why are you negotiating?
Before getting into any negotiations, it is crucial that you, as the employer, have a clear idea of what you want to achieve and how far you are willing to go to achieve it.
You will need to carefully consider several issues so that you are in a strong position from the outset.
These issues include:
- Whether the organisation can defend potential claims or the organisation is in a vulnerable position
- The potential losses of a successful claim, such as financial cost and reputational damage
- Contractual payments the employee must receive and any non-financial elements the organisation is willing to offer
- Issues the organisation wants to include in the settlement agreement, for example, post-termination restrictions
- Issues that the organisation is not prepared to compromise on
It is important to present the right initial offer so that it is attractive to the employee but does not give them unrealistic expectations.
Often employers will begin by offering somewhere between 50% to 70% of the maximum amount they are prepared to offer to allow some room for negotiation.
Alternatively, you could go in with your maximum offer so long as you make it clear to the employee that you will not go any higher than this.
This stronger approach is appropriate if you are willing to compromise on non-financial elements of the settlement agreement or if there is no real risk of the employee bringing claims.
The first conversation with the employee is valuable as it sets the tone for the entire negotiation process.
A common cause of disputes in this type of situation is miscommunication so it is important to have effective dialogue from the outset.
You should take this opportunity to explain to the employee why their employment is ending and why they are being asked to sign a settlement agreement before they seek independent advice.
If an employee understands the business reasons for their dismissal, they will be less likely to bring claims or make unreasonable demands during the negotiation process.
Explaining the settlement agreement
There is a strong chance that the employee will not know what a settlement agreement is, so you should explain that they are common and there is no secret agenda behind it.
It is essential that you have a good understanding of the terms of the settlement agreement before engaging in any conversation with the employee.
This will allow you to outline the terms to the employee and explain the reasons why they have been added, as well as explaining how the settlement amount has been calculated.
Any genuine attempts to resolve ongoing disputes during the negotiation process will be ‘without prejudice’, which means such conversations cannot be used as evidence in a tribunal or court.
It is advisable to tell the employee that any such discussions are ‘without prejudice’ as it demonstrates your understanding of the process.
If there are no existing disputes, you may have ‘pre-termination negotiations’ with the employee, which cannot be used as evidence.
However, this is more limited than ‘without prejudice’ as it only applies to correspondence relating to settlement agreements and termination of employment, including unfair dismissal claims.
It would not apply to other claims the employee may bring, such as breach of contract, discrimination and whistleblowing.
Allegations of claims
An employee who is requested to sign a settlement agreement must obtain independent advice from a lawyer or trade union representative.
The employee’s lawyer or representative will begin by searching for potential claims against the employer so that they can determine the suitability of the settlement offer.
If you receive allegations of claims such as unfair dismissal, discrimination, or breach of contract, it is important to remain calm.
Any correspondence relating to the settlement agreement will be ‘without prejudice’ but is advisable to avoid acknowledging any claims as far as possible as it will considerably weaken your negotiating position.
You should take time to think about the allegations and negate any information that is inaccurate.
When the allegations are valid, and the organisation has clearly made a mistake, denial will not be the best approach.
Having said this, you should not feel pressured to accept the employee’s first counteroffer as you may have other arguments you can put forward to defend your position.
In this situation, you can inform the employee or their representative of:
- The duty to mitigate their losses
The employee must actively seek alternative work to reduce their financial losses as they cannot solely rely on compensation from the employer.
- The ‘no difference’ rule
If the claim relates to an unfair process, but the outcome would have been the same if a fair process was followed (i.e. the employee would still be dismissed), the compensation will be reduced to account for this.
- The inconveniences of tribunal claims
A successful tribunal claim is never guaranteed, and the process of bringing a claim is demanding and time-consuming and can take up to 2 years in total. If the employee is successful, they will be unlikely to recover their legal costs.
These points may put the employee off bringing a claim and make your settlement offer look more attractive in comparison.
Increasing an offer without weakening your position
If you want to raise your offer instead of accepting a counteroffer, you should present it in a way that suggests you want to speed up the negotiation process and reach agreement quickly.
This will allow you to increase the offer without appearing weak.
Non-financial elements of a settlement agreement
Settlement agreements are not just about money, and sometimes employees will be willing to compromise on the settlement figure in exchange for non-financial benefits.
You may be able to offer the employee a favourable but accurate reference, which will assist the employee in seeking other employment.
This is not always possible, as it is common for employers to have a reference policy, whereby only the job role and dates of employment will be provided.
If this is not the case for your organisation, a detailed reference may be a useful incentive to offer.
However, you must be aware that any reference you provide must be fair and not misleading in any way, so you should be prepared to justify anything you say.
You can provide further support to the employee in finding other employment by offering outplacement support.
You may be able to offer outplacement support through an approved provider of the organisation, or where there is no approved provider, you can make a financial contribution to the support.
The small cost involved in such services may be worthwhile as it will discredit any arguments that the employee will be out of work for a considerable length of time and it may reduce the settlement amount.
Most settlement agreements will contain an agreed departure phrasing, but this is something that can be discussed if it is important to the employee.
You may be able to agree an internal announcement with the employee and this can be more detailed than the external announcement if appropriate.
Paying the employee’s legal fees
There is no legal obligation on an employer to pay for the employee’s legal fees but in practice an employer will almost always contribute in some way.
It is common for an employer to pay between £500 and £1000.
The payment of legal fees by the employer will be tax-free if:
- The invoice was addressed to the employee, but it stated it was payable by the employer
- The fees were entirely incurred upon termination of employment
- The payment of legal costs by the employer is covered by the settlement agreement
Generally, we would not advise increasing the payment towards legal fees upon request from the employee unless it is the only way to reach a settlement agreement.
Deadline for acceptance
Employers can set a deadline by which an employee must accept a settlement offer.
However, to comply with the Acas Code of Practice, a deadline cannot be shorter than 10 calendar days, so that the employee has enough time to review the settlement agreement and obtain independent advice.
If an employee rejects an offer, the employer can withdraw it and does not need to present it again.
However, this approach can be counterproductive in making it more difficult and time-consuming to reach an agreement.
If you want to impose a deadline for acceptance, we recommend that you notify the employee of the deadline when you present the offer.
If you and the employee cannot reach a settlement agreement, you can still dismiss the employee.
However, if the settlement agreement is not signed, then none of the mutual terms will apply upon the termination of employment.
Most likely, you will have already provided the employee with notice of termination separately from the settlement agreement.
If you have not, then you will need to serve the employee’s contractual or statutory notice period or pay them in lieu of this if it is permitted under the employment contract.
It is important that you comply with any contractual rules concerning termination and that you follow a fair disciplinary and dismissal procedure, particularly if the employee has at least 2 years’ continuous service and therefore unfair dismissal rights.
It is still possible for a settlement agreement to be signed after the employment has terminated.
To negotiate a settlement agreement confidently you should:
- Be clear on what you want to achieve through the agreement and the elements you are willing to settle on, so that you have a consistent approach throughout the process.
- Be transparent with the employee on the terms of the settlement agreement as this may make them more willing to compromise.
- Remain calm and do not cave into the pressure of claim allegations.