Sometimes, a clean, fuss-free exit is best for an underperforming or unhappy employee – but striking the right deal requires careful consideration

Breaking up is hard to do, especially when it comes to Alan. It’s not him, it’s you. You’ve changed. You’re not the same mid-sized company with a local focus he joined 15 years ago. You’re now a larger player with a global footprint and, despite attempts to offer him a different role and to upskill him, his frustration has boiled over and is affecting the rest of the team. The writing’s on the wall, and Alan knows it.

But he has given you plenty of loyal service and is a popular staff member, so putting him through a formal capability procedure and leaving him with the bare minimum of redundancy seems heartless and could dampen everyone’s morale. Surely there’s a better way?

Settlement agreements, known as compromise agreements until July 2013, can be used to strike a deal with an employee, often with the employer offering better terms than would have been offered under contract – while also drawing a line under not only any contractual claims but also various statutory ones.

They are an increasingly common tool in tricky situations, particularly in the public sector – NHS Employers has issued guidance about their proper use, and the BBC revealed last April that 17,571 settlement deals, valued at a total of £226.7m, had been entered into by councils and local authorities between 2010 and 2015 – and are being seen more frequently in areas such as financial services. Used properly, they have much to recommend them. But that doesn’t mean they are a panacea, or that the process is straightforward.

Sam Sales, managing director of Call HR and People Management’s resident agony aunt, says it is increasingly employees who introduce the idea of a settlement: “There is an element of fairness creeping in. Employees are thinking: ‘I’ve seen I might be pushed out, so I’m going to get there first.’”

The nature of the financial settlement varies widely and depends on factors including length of service and statutory redundancy owed, as well as the specific dynamics in play. It can reach 18 months’ salary, but Naeema Choudry, partner at Eversheds Sutherland, says: “As a ballpark, you would expect it to be somewhere between three and six months’ pay, depending on the individual’s seniority and what the employer’s approach is.”

Sales adds that, when deciding an offer, businesses should consider the same factors a tribunal would, such as “length of service, what the situation would be if somebody was going to be made redundant, what sort of job they are in and whether they’re in a role that will be difficult to get when they go back on to the market.

“Settlement agreements are best used where you have tried to get somebody to engage with a change or deal with their performance. Maybe they haven’t made that shift, but they have had really good service in the past.”

Stefan Martin, partner at Hogan Lovells, says settlement agreements are more readily accepted when the employer is prepared to go beyond their standard redundancy package. “There, the employer is doing something they do not have to do,” he says. “In return, it is not unreasonable to require the employee to say: ‘I accept that in settlement of any claims I might have.’ That, if you like, is the ultimate win-win situation.”

Choudry, meanwhile, says they are useful for saying goodbye to senior staff: “You are wrapping up a whole host of things – their resignation as a director, announcements that are going to be made publicly, references. Rather than having them on different pieces of paper, it’s better to have it all in one document where everybody knows what the situation is.”

The legal framework for a settlement agreement begins, crucially, with a protected conversation where the offer is introduced. This prevents the discussion being used in a later unfair dismissal claim, and should follow the Acas code of practice. But what you say, and how you say it, can make a big difference.

Sales warns that managers often run into hot water when they sugarcoat the discussion. “Make it clear that this is a conversation about how you feel things are going and what they are feeling too,” she says. “Don’t be wishy-washy: that’s a big mistake because it just makes people upset.” It’s wrong, she adds, to assume the other party will immediately accept they are leaving: “If someone says:
‘No, I don’t want to go,’ where do you go from that conversation?”

Employers should be aware that negotiations can drag on. Martin has seen some businesses open with a so-called final offer, but warns: “Don’t offer a lowball amount, knowing that you have room to negotiate, but describe it at the outset as ‘take it or leave it’. You don’t really mean that. You will lose credibility if you make a very unreasonable offer.”

Companies should also be clear about which rights are covered by the agreement. In a case settled last year, Campus Living Villages was told by HMRC it must pay a former employee statutory maternity pay as she had been on their books 11 weeks before her due date. The taxman was not swayed by the £60,000 offer she had been given in “full and final settlement of
all her claims”.

The do-it-yourself approach can trip people up, says Choudry. Certain terms, which can look like legal gibberish, often need to be included to make the agreement binding and, as the law moves quickly, even boilerplate agreements should be reviewed regularly.

Where settlement agreements have gained a poor reputation, it is around the inclusion of confidentiality (or ‘gagging’) clauses. These can simply cover the terms of the departure itself, prevent the disclosure of sensitive business information such as financial details, or be extended to prevent someone discussing their former employer in any context (though this cannot legally be used to stop a whistleblower speaking out in the public interest).

A number of councils have been criticised for including such clauses as standard in all agreements – their use is now banned in the NHS – but while Sales says a blanket approach to such clauses is wrong, they can be useful when employers want to ensure discretion around the terms of an agreement. “There are good reasons that some people leave an organisation with no money at all or with just notice,” she says. “It has to be done on a case-by-case basis but we’ve got to be realistic about how confidential we want people to be and at what point they can start talking about it.”