When to offer a settlement agreement to an employee

Many businesses are under pressure to restructure or manage change. Hybrid working models, shifts in employee expectations, and the rise of AI and automation have altered how teams operate. At the same time, there's growing awareness of mental health, wellbeing, and the impact of workplace culture — all of which can create tension if not carefully managed.

Settlement agreements aren't a shortcut. They can damage trust and invite challenges if used too early or without justification. But when handled properly, they're a commercial tool that allows both sides to move on cleanly.

If you're considering this option, contact our employment solicitors, who can help you assess the risks, discuss the timing and how you make a settlement offer and prepare the right terms.

Here are some of the most common situations where offering a settlement agreement can make sense.

1. Performance or conduct concerns

If an employee is already under review for performance or conduct, and relations have become strained, a settlement agreement can bring the matter to a close without a drawn-out process. The employee avoids formal disciplinary action. The business avoids the risk of procedural flaws, taking up management time and ongoing disruption.

That said, the employee should be aware of the concerns rather than have a settlement agreement presented out of the blue, and it is worth taking advice from our employment solicitors on how to do this.  

2. Redundancy situations

Settlement agreements can be used during redundancies, particularly where the process carries risk or complexity. You may want to offer enhanced terms, include confidentiality provisions, or ensure a clean break, particularly where an employee has raised concerns about the consultation process, selection criteria or scoring.

This is often the case with longer-serving staff or senior roles where future disputes are more likely. A well-drafted agreement removes uncertainty and protects the business.

3. Grievances and workplace disputes

A settlement agreement may be the most practical route forward when a grievance has been raised, or working relationships have broken down. It avoids the disruption of an internal investigation and the uncertainty of a tribunal claim. Clauses can be included to protect confidentiality, reputation, and the integrity of the wider team. 

Again, however, this approach needs to be handled with care, and we recommend taking specific advice from our employment solicitors in this regard.

4. Senior and executive exits

Settlement agreements are routine at board and senior management level. They allow you to address bonuses, share options, restrictive covenants, and exit announcements in a structured way. For the business, it reduces reputational risk. For the departing executive, it provides clarity and discretion. 

For more detail, see our article on settlement agreements for directors and senior executives.

Understanding the legal status of a settlement agreement

Settlement agreements are the only legally recognised way to waive most statutory employment claims in the UK, including unfair dismissal and discrimination.

To be binding, the employee must receive independent legal advice before signing. Employers should allow time for this step and ensure the terms are clearly drafted.

When not to offer one

Settlement agreements should not be used to avoid a fair process or suppress employee concerns. If mishandled — or offered without cause — they can undermine trust and create further issues. Timing, communication, and legal drafting all matter.

Taking expert advice before making an offer

A well-handled settlement agreement can bring certainty to a sensitive situation and protect your business from unnecessary risk. If it is poorly timed or badly drafted, it can make matters worse.

If you're considering making an offer, our employment solicitors can help you assess the situation and draft clear, enforceable, and commercially sound terms.