Sometimes, employment terminates through a mutually agreed settlement between an employee and their employer. This process allows both parties to formally end the employment relationship, typically with the payment of a termination package outlined in a settlement agreement.
While this can be a stressful and uncertain time, it also offers an opportunity to take control of the situation and improve the terms on offer. Understanding the process and knowing how to approach discussions strategically can make a significant difference.
In this guide, we explain the steps involved in negotiating a settlement agreement in the UK and share practical strategies to help you strengthen your bargaining position and secure more favourable terms.
Summary
This article covers:
- What is a settlement agreement
- Key clauses you can negotiate in a settlement agreement
- Negotiating strategies that employees can use
- What are the legal requirements for a settlement agreement to be valid
- Balancing an employee's and an employer’s interests to gain a resolution that is acceptable to both
- Practical examples of successful negotiations
What is a Settlement Agreement?
A settlement agreement, previously known as a compromise agreement, is a legally binding contract between an employer and an employee to resolve an employment dispute, often by ending the employment relationship.
In exchange for financial compensation and possibly some non-financial benefits (such as a work reference), the employee agrees to give up their rights to bring any future legal claims against their employer.
Most employment claims can be settled by way of a settlement agreement. Some examples of relevant claims include:
- Unfair Dismissal
- Discrimination Claims
- Claims related to Holiday or Holiday Pay
- Equal Pay
- Unlawful Deduction from Wages
They may also be used when an employee is being made redundant, or subject to disciplinary action, or to handle senior-level exits.
Can You Negotiate A Settlement Agreement?
You can and should negotiate a settlement agreement to ensure the terms are fair. Both parties can initiate discussions, so you don’t have to wait for your employer to make the first move; you can start the process yourself by sending a ‘without prejudice’ letter outlining your proposed terms. Similarly, if the employer’s initial offer isn’t acceptable, you can make a counteroffer. The first offer is rarely final, and if you feel the compensation isn’t fair, you have every right to ask for more.
Step-by-Step Guide: How to Negotiate a Settlement Agreement
Successfully negotiating a settlement agreement requires careful preparation, legal support, and a strategic mindset. Follow these steps to secure the best possible outcome:
Carefully Review the Offer and Terms
Before signing anything, take time to read the draft settlement agreement and the accompanying offer letter in full. Even if the compensation appears generous, hidden clauses in the small print may affect you negatively.
It is important to understand what you are being asked to agree to and, crucially, what rights you are giving up. Make a note of the financial offer, how it will be taxed and whether it includes holiday pay, bonuses and expenses. Similarly, review the agreement for non-financial clauses relating to references, confidentiality, how your departure will be announced and any ongoing restrictive covenants, such as non-compete clauses and ensure you understand what is required of you.
Take your time and consider the proposals for a few days. Do not be pressured into accepting the first offer immediately; you want to make sure you get as good a deal as possible, so it is perfectly acceptable to go away and think about whether you want to make a counteroffer.
Seek Legal Advice
A settlement agreement will only be valid if you have received independent legal advice from a legally qualified solicitor. In many cases, the employer will pay for or contribute a set amount (often £500 or more plus VAT) towards your legal costs.
It is crucial to seek legal advice as a solicitor will explain the effect of the agreement and what rights you are waiving. They can also assess the fairness of the offer and advise whether you could achieve more through negotiation or a tribunal claim.
Identify Leverage
Work with your solicitor to determine what is most important to you and how you can strengthen your position. Define your priorities, for example, a higher payout, a specific reference letter or release from restrictive covenants.
List your value to the business - your contributions, client relationships and successful projects. Consider what motivates your employer to settle (for example, avoiding the cost and publicity of a tribunal case). This can help determine your negotiating tactics. It may also be worth putting forward some concessions to your employer, for example, they might be keen to have a confidentiality clause or a smooth handover to your successor.
Plan a realistic counteroffer that starts at the top end of what is reasonable, leaving room for compromise and avoid unrealistic demands that might result in you losing credibility and stalling negotiations.
Negotiate Key Financial and Non-Financial Terms
Discussions should take place on a ‘without prejudice’ basis, meaning they’re confidential and generally not admissible in a tribunal if negotiations break down.
Maintain professionalism throughout by remaining calm, courteous and constructive. Focus on presenting your proposals as a commercial solution, a win-win outcome for both parties.
The main financial concern is typically a termination payment, so ensure you understand how different payments will be taxed. Payments up to £30,000 for termination may be tax-free. Confirm whether the agreement covers accrued but untaken holiday pay, pension contributions, bonuses and expenses.
You may be able to secure non-financial terms that are valuable to you but don’t cost your employer too much, for example, a positive written reference or outplacement support, such as help with CV writing and job searching.
Finally, once you and your employer reach an agreement, review the final draft with your solicitor to ensure all agreed-upon terms are correctly included. Only agree and sign the deal when you’re satisfied with the terms and fully understand its implications.
Key Clauses You Can Negotiate
When entering into a settlement agreement, employees can often negotiate several key clauses to ensure a fair and balanced outcome. Both financial and non-financial terms can be discussed to better reflect your circumstances and protect your future interests. Common negotiable clauses include:
- Settlement Amount: The total payment offered is often subject to discussion, especially if you have a strong potential claim, long service, or mitigating factors that enhance your bargaining position.
- Breakdown and Tax Treatment of Payments: You can negotiate how payments are structured and categorised (e.g., compensation, notice pay, bonus), as this impacts tax treatment.
- Notice Period: Discuss whether you will work your notice period, be placed on garden leave, or receive a payment instead of notice (PILON).
- Bonuses and Benefits: You may be able to secure payment of earned or pro-rata bonuses and retain certain benefits during your notice period.
- Legal Fee Contribution: Employers usually contribute towards your independent legal advice. The amount of this contribution is often negotiable.
- Reference Wording: Agreeing on the wording of your reference beforehand is crucial for future job searches. A positive or detailed reference can be more valuable than a neutral one.
- Termination Date and Reason: The formal termination date and the reason for your departure can be negotiated to prevent future complications or misunderstandings.
- Confidentiality Clauses: The scope and duration of confidentiality or non-disclosure obligations may be open to negotiation, especially if they are overly broad.
- Restrictive Covenants: Clauses such as non-compete or non-solicitation restrictions can often be limited in duration or scope, particularly if your dismissal involved a possible breach of contract.
- Return of Company Property/Continuation of Benefits: You may be able to negotiate the temporary retention of items like a company car, phone, or laptop, or the continuation of benefits such as private medical insurance for a specified period.
Negotiating Strategies For Employees
When presented with a settlement agreement, it’s important to approach negotiations carefully and strategically. The goal is to achieve a fair outcome that reflects your rights, contributions, and circumstances. Below are key strategies to help you strengthen your position.
- Seek Early Independent Legal Advice: Engaging an employment solicitor at an early stage can make a significant difference. They can assess the true value of your potential claims, ascertain your negotiation leverage, and communicate effectively with your employer. Using solicitor correspondence often adds weight to your position.
- Avoid Resigning Prematurely: Resigning before negotiations are complete can weaken your position and may affect your right to claim unfair dismissal, a valuable bargaining tool during discussions.
- Do Not Accept the First Offer Immediately: Take some time to consider the proposed terms. You should not feel pressured into accepting the first offer. Settlement deadlines can usually be extended upon request.
- Understand your Bargaining Power: Evaluate what legal claims you may have, as your leverage depends on their strength. Gather relevant evidence, such as emails, performance reviews, and a diary of workplace events, to support your case.
- Present Your Counteroffer Professionally: Keep discussions polite and constructive. Being overly aggressive or making unrealistic demands can harm your credibility and derail negotiations. Base your counteroffer on reasonable calculations, such as potential tribunal awards or industry benchmarks, rather than emotion.
- Consider Formal Grievances Strategically: If without prejudice discussions stall or you wish to remain in employment, raising a formal grievance can be a tactical step. It obliges your employer to address your concerns through their internal procedures and may increase negotiation pressure.
Legal Requirements for Settlement Agreements
For a settlement agreement to be legally binding in the UK, certain conditions must be met. The employee must receive independent legal advice from a qualified adviser (such as a solicitor or certified trade union official) and must agree to the terms voluntarily. Without this advice, the agreement is not valid.
In addition, the agreement must:
- Be in writing
- Relate to a specific complaint or potential legal issue
- Identify the independent adviser who provided the legal advice
- Be signed by both parties
Settlement Agreements - Employer v Employee Perspective
Although both parties are interested in achieving a resolution that is acceptable to both, their motivations and priorities frequently vary. Gaining insight into both viewpoints can facilitate a more efficient and fair negotiation process.
Employer Perspective: Managing Risk and Avoiding Tribunal Claims
From the employer’s point of view, a settlement agreement serves as a means to manage risk, protect business interests, and ensure a clean, confidential exit. Employers typically use settlement agreements to bring closure to employment matters and evade the costs, uncertainties, and publicity associated with tribunal claims.
Their primary objectives include:
• Legal Protection: Ensuring the employee waives potential claims (e.g., unfair dismissal, discrimination, breach of contract) in return for an agreed payment.
• Certainty and Closure: Attaining a definitive conclusion to the employment relationship, thereby preventing ongoing disputes or reputational harm.
• Minimal Disruption: Ensuring the exit process is conducted professionally, minimising both internal and external disruptions.
• Cost Control: Proposing a fair yet commercially reasonable settlement amount to avoid larger tribunal awards or extended negotiations.
Employee Perspective: Balancing Tribunal Prospects Against Settlement Certainty
For employees, a settlement agreement provides an opportunity to achieve certainty, closure, and financial compensation without the risks tied to pursuing a tribunal claim. However, before signing, employees should carefully weigh the value of a guaranteed settlement against the potential (yet uncertain) outcomes of tribunal proceedings.
Key considerations for employees include:
- Certainty vs Risk: A settlement guarantees immediate compensation, reduces stress, and allows for a clean break. In contrast, a tribunal may offer a larger payout, but it also involves considerable uncertainty, stress, and potential expenses.
- Strength of Legal Claims: Employees ought to evaluate the strength of their case with their legal adviser. Strong claims (such as those involving discrimination or whistleblowing) enhance negotiation power and may warrant pursuing a higher settlement.
- Costs and Time: Tribunal processes can extend over months (or even longer) and necessitate evidence collection, hearings, and legal representation. Settlements offer a faster, less confrontational resolution.
- Reputation and References: Settlement agreements frequently include agreed reference wording, which can protect future employment opportunities, a guarantee that a tribunal outcome does not provide.
In the end, employees must decide whether the certainty of a settlement is more valuable than the potential (yet uncertain) benefits of litigation, a decision best made with the guidance of an independent employment solicitor.
When handled fairly, a settlement agreement can serve as a win-win scenario: the employer sidesteps the expenses and risks of tribunal litigation, while the employee secures compensation, closure, and control over their exit terms.
Risks of Signing Without Negotiation
Entering into a settlement agreement without any negotiation places you at considerable risk and may result in lost opportunities.
The initial offer is usually the employer’s starting point, and by signing immediately, you may miss out on additional compensation, lose your negotiating power, and accept less than you could secure through negotiation or a tribunal.
Without negotiation, the payments could be classified in a manner that creates unnecessary tax obligations, for instance, designating part of the settlement as taxable "notice pay" instead of tax-exempt compensation (up to £30,000). Likewise, you could end up with clauses that unjustly limit your ability to work for competitors or reach out to former clients, which could impede your career prospects. These terms can often be modified or removed during negotiations.
Finally, if you skip the negotiation process, you risk losing your right to notice pay or holiday pay, missing the opportunity to retain benefits (like health insurance, a company car, or bonus eligibility) for a brief period after leaving, or ending up with an unclear or unjust termination date on your employment record.
Practical Examples of Successful Negotiations
Scenario One
An employee was offered £8,000 in a settlement agreement after being made redundant. After taking legal advice, the employee pointed out that the redundancy process had not adhered to proper consultation rules and that they had grounds to claim unfair dismissal.
Outcome: To mitigate the risk of a tribunal claim, the employer increased the settlement offer to £16,000 and also provided a positive reference.
Scenario Two
A senior employee was subject to a 12-month non-compete clause that would have prevented them from joining a new employer in the same industry.
They contended that the restriction was overly harsh and highlighted that the dismissal was not due to performance issues.
Outcome: The employer agreed to reduce the restriction to six months and limit its scope to key clients only.
How We Can Help
Hiring an experienced employment lawyer to represent you in negotiations will help you understand the practical implications of the terms on offer, as well as help you achieve more favourable terms. It is also likely that your employer will take you more seriously if they know you are backed by a legal expert.
Our experienced employment team are expert negotiators who will provide you with all the necessary advice and negotiate directly with your employer to secure the best possible deal. For more information on how we can help you negotiate more favourable settlement agreement terms, call us today on 0300 303 2071 or email us.
FAQ
Can you negotiate a settlement agreement in the UK?
You absolutely can and should negotiate a settlement agreement to make sure the terms are fair. The initial offer is seldom the final one, and if you believe the compensation isn’t adequate, you have every right to request a higher amount.
What should I ask for in a settlement agreement?
When you’re negotiating a settlement agreement, it’s important to ask for financial compensation, which should include any accrued but unused holiday pay, outstanding bonuses, and payments for notice periods, along with a mutually agreed reference. You might also want to add clauses regarding confidentiality, the termination date, and the employer’s contribution to your legal fees.
How much can you negotiate on a settlement agreement?
The amount you can negotiate depends on your individual situation, including the strength of your claim, potential loss of future earnings, and your length of service. However, a typical ex gratia (tax-free) termination payment ranges from 2 to 4 months’ gross salary.
Do I need a solicitor to negotiate a settlement agreement?
To ensure that the settlement agreement is valid and binding, you must have received independent legal advice. There are numerous benefits to hiring a solicitor throughout the process, especially during negotiations, as they have the expertise to handle employer interactions and can effectively leverage your bargaining power to achieve better financial terms.
How long does settlement agreement negotiation take?
The time it takes to negotiate a settlement agreement varies based on the complexity of the case and how willing both parties are to negotiate; generally, it can take anywhere from a few days to several weeks, with the average negotiation lasting between 2 to 4 weeks.
