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Sameer Karim

DWS Solicitors

Senior Partner

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When is a settlement agreement the right choice?


Dismissing an employee is rarely a straightforward or ideal situation. But occasionally, an employer-employee relationship breaks down to such an extent that it is impossible for employment to continue. In these instances, a settlement agreement is a way to constructively end the employment, adding structure and certainty to the process.

A settlement agreement allows both parties to negotiate the terms of the departure, akin to a settlement. By signing a settlement agreement, the employee waives their right to claim through an employment tribunal and leaves without the stigma of being dismissed, so both parties part on good terms.

When is a Settlement Agreement Appropriate?

When an employer and employee reach a point in their relationship that the continuing employment would be detrimental to the business, a settlement agreement may be the least disruptive solution. A couple of examples may be if an employee’s grievance has not been upheld, or if they have been disciplined and are unhappy with the punishment. In both cases, the employment has broken down but there are thin grounds for fair dismissal.

Employer’s Perspective

From an employer’s perspective, firing an employee is in itself an unpleasant decision, but also a risky one; for the next three months (excluding one day), they have to wait in the hope that the former employee will not take their case to an employment tribunal and try and get their job back or claim compensation against them.

In many cases, the financial implications of a claim would be more damaging than simply ‘paying off’ the employee with a few months’ wages. For this reason, including a severance payment or advance in the terms of the settlement is often a relatively attractive solution.

Employee’s Perspective

From an employee’s perspective, a settlement agreement is a ‘clean break’: being fired from a job is an unwelcome prospect for anyone, no matter what the circumstances. To be suddenly without work or income is very stressful and applying for future jobs will involve a difficult conversation about the reasons for leaving the previous position.

If the employee feels that they were treated wrongly or unfairly, they have the right to visit an employment tribunal in order to try and get their job back or to claim compensation. But this is not always an appropriate or desirable course of action. If the employee wishes to bypasses this route, a settlement agreement allows them to resign from the post on their own terms. Negotiating a severance payment or advance can also help to take the financial sting out of unemployment.

When is a Settlement Agreement Not the Answer…

…For the Employer

If the employer has ‘good cause’ for terminating the employment contract, for example the employee is incompetent or unwilling to carry out their role, or there has been serious or gross misconduct, then a settlement agreement may not be necessary as the employer does not need to protect themselves against the possibility of a claim from their former employee.

…For the Employee

If the employee has genuine grounds for a claim against their former employer for wrong or unfair treatment – for example on the grounds of discrimination – then they would not be advised to sign a settlement agreement. In this instance, their best course of action would be to consult an employment tribunal.

Next Steps

If a settlement agreement is decided, the employee must seek the advice of an independent lawyer before signing. This is because the agreement is legally binding and the employee must make sure they understand that they are waiving some of their employment rights. Their lawyer must also sign to confirm that they have explained the legal implications. These conditions are outlined in s.203 Employment Rights Act 2006.

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Sameer Karim

Senior Partner

Read more from Sameer Karim