How to Negotiate a Settlement Agreement

Can you negotiate a settlement agreement?

Yes. An employer’s first offer is often open to discussion, but whether to make a counter-offer, and how much to ask for, depends on the circumstances of your departure and what matters most to you. You can also negotiate terms such as your financial compensation, leaving date, reference and restrictive covenants.

Here are a few tips to maximise your chances of getting the best possible deal.

1. Prepare Well for the Settlement Agreement Negotiation

If your boss calls you into a room, sits you down, and offers you a settlement agreement, they may want an immediate response. What should you do?

Take your time

We advise asking for a few days to think about the proposed severance package.

Depending on your experience, you may never have been in this situation before. What is a settlement agreement, and why are they offering you one? Take your time to find out.

The ACAS Code of Practice on Employment Settlement Agreements recommends that employees are given at least ten calendar days to consider the formal written terms of a settlement agreement and obtain legal advice. Although this isn’t a strict legal requirement, all employers should consider it.

This gives you time to:

• think about what you’ve been offered;
• obtain legal advice on the settlement agreement from a specialist solicitor; and
• prepare a response

In my experience, many employees don’t need the full 10 days, and it’s often better to respond sooner, provided you have had the advice and time you need.

Think about your best-case scenario

Think about what you’d really be happy with in this settlement agreement. What’s most important to you? What are the ‘nice-to-haves ‘?

Now consider your worst-case scenario

At the same time, think about your worst-case scenario. What’s your bottom line for an acceptable settlement?

If you can answer these questions, you’ll be much better positioned to begin negotiating the settlement agreement.

What is high value to you that may be low value to your employer (and vice versa)?

Some things may be really important to you and won’t cost your employer anything. An obvious example is a reference.

Similarly, some factors may be crucial for your employer but not something you’re too bothered about. For instance, employers usually like to keep termination payments confidential. Most employees are happy with that, although when I advise on a settlement agreement, I check who the confidentiality clause allows you to speak to. If it is too broad, I usually ask for an exception that allows appropriate discussions with recruitment consultants and prospective employers, so it doesn’t prevent you from explaining your departure when looking for work.

2. Decide which tactics to use when you negotiate the settlement agreement

Why should your employer accept your counter-offer?

Most companies won’t want to pay staff any more than the law requires. Consider your employer’s incentive to pay you a higher financial settlement. Why should they negotiate?

For example, it may be that if you refuse the proposed agreement, you could claim compensation in an Employment Tribunal. The incentive to pay you more is that, in return, you agree not to pursue a legal claim. Alternatively, your employer may feel a sense of moral responsibility to pay you more, even if they haven’t done anything wrong.

When making a counter-offer, which tactics will you use?

1. The strict legal approach

This may be sensible where your employer is offering you far less than you would recover if your claim succeeds in an employment tribunal.

Where there are potential legal claims, explain why they justify a higher offer. You can make that point firmly while still making clear that you would prefer an agreed resolution.

This is a potentially hostile approach which may be appropriate where, for example:

• your employer has acted unfairly or unreasonably
• the relationship has already broken down
• you are seriously considering legal proceedings.

If you’re not sure what to do, read this article on whether to claim unfair dismissal or accept a settlement agreement.

2. Negotiating on a goodwill basis

Sometimes a gentler approach can yield better rewards.

You may not have any commercial or legal leverage to persuade your employer to pay you more money. In other words, the law doesn’t require them to pay you more than they are already offering in the proposed agreement.

This is most likely to be the case where:

• you’ve been employed for less than the qualifying period for ordinary unfair dismissal, although some types of claim, such as discrimination, don’t require any minimum length of service.
• you’re being offered a settlement agreement as an alternative to redundancy, and the redundancy is clearly fair

However, you may get a better outcome by negotiating the settlement agreement on the basis of goodwill. I’ve often found that an employer may genuinely want to be helpful and show gratitude for hard work.

Your grounds for settlement negotiation may include factors that an Employment Tribunal would not take into account. This may include:

• The fact that you’ve contributed a lot to the business
• The difficult situation that you will be in as a result of losing your job
• The sacrifices that you have made in your personal life to benefit the company

These tactics often work better with smaller companies where the business feels like family. However, even if you don’t have this kind of relationship with your employer, this approach may still work better than threatening an employment tribunal claim.

3. Ask for a Protected Conversation with your Employer

Your employer should ideally make the settlement offer in the context of a protected conversation. These discussions are generally inadmissible in an ordinary unfair dismissal claim. That protection does not extend to discrimination claims or automatically unfair dismissal claims, such as whistleblowing dismissal, and improper behaviour can affect it. It’s similar to the without prejudice rule. 

If your employer doesn’t invite you to a protected conversation, you may want to ask for one yourself. This signals to your employer that you’re taking matters seriously and want to ensure the process is conducted correctly.

You may find it helpful to read the ACAS Code of Practice on Settlement Agreements, which contains some useful information about protected conversations.

4. Don’t ask for too much

You may have heard in the news about former employees being awarded enormous amounts of money by an Employment Tribunal. Don’t assume you will get the same. Several factors determine how much you should reasonably expect in a settlement. The most important ones are:

• Your salary
• How long it’s likely to take you to find another job
• How long you’ve been employed
• Any terms in your contract that entitle you to an enhanced sum
• In some cases, injury to feelings

When advising on an offer, I consider two questions: how likely is a claim to succeed, and what compensation might be awarded if it does? These matter because signing the agreement means giving up your right to pursue the claims it covers.

Where you are still employed, I assess what has happened so far and what the employer proposes to do next. Whether a future dismissal would be unfair will depend on the employer’s reason and the process it follows.

Lost earnings are often an important part of the assessment. How long might it take you to find another job, and would it pay a similar amount? If there is a discrimination claim, compensation for injury to feelings may also be relevant.

Some of these calculations may need to be estimated (for example, you don’t know how long it will take you to find another job). However, be reasonable in your assessment. Don’t exaggerate, or you will lose credibility.

You can make a counter-offer at the upper end of a realistic range, provided you can explain the figure. After all, your employer is likely to try to negotiate down. However, if you ask for too much, your employer is unlikely to take you seriously.

5. Don’t ask for too little

Some employees are embarrassed about asking their employer for more money. They don’t want to ask for a large amount, even if it’s reasonable. This may be because:

• they don’t want to appear selfish or money-grabbing
• they’ve had a good relationship with their employer and feel a level of loyalty
• they feel that asking for more money may break an otherwise healthy relationship with their employer

However, this could leave you with less than you could get, leading to unnecessary financial difficulties.

Be confident in asking for what’s reasonable. Be respectful and courteous in your communications, but don’t undersell yourself. Be prepared to justify why you’re asking for a certain amount. For example, you could explain to your employer the difficulties you will face if you lose your job and how long it’s likely to take you to find another one.

Clients sometimes worry that asking for more will cause their employer to withdraw the original offer. I rarely see that happen. More commonly, the employer rejects the counter-offer and repeats its previous offer. Withdrawal remains possible, so it is sensible to consider the wording of the offer and your circumstances before responding.

6. Find out how the settlement payments will be taxed

Make sure you understand the tax position when considering a settlement offer. Otherwise, you may receive less money than you expected.

The tax status of the various financial amounts in a settlement agreement depends on the nature of the payment.

The first £30,000 of qualifying termination compensation and statutory redundancy pay is normally free of income tax and national insurance. However, most other payments, such as wages, holiday pay and any payment in lieu of notice, are taxable.

For more information about how HMRC views termination payments, read this article about settlement agreement tax.

7. Consider non-financial matters

In many cases, the most significant aspect of a settlement is the termination payment. The amount you receive is likely to be important, especially if your employment is coming to an end.

However, you should also consider other factors when negotiating.

References

The reference attached to a settlement agreement is often limited to your job title and employment dates. Clients sometimes worry about this, but it may simply reflect the employer’s standard reference policy. I usually recommend accepting that official reference and also asking a line manager or colleague whether they can provide a separate personal reference. This would be in their own name, not on company letterhead, and outside the settlement agreement.

Restrictive covenants

Your employment contract may contain restrictive covenants that prevent you from working for a competitor or dealing with your employer’s customers. You may want to ask for a clause in the settlement agreement that releases you from those restrictions. However, refusing the settlement agreement does not automatically remove restrictions already contained in your employment contract, although their enforceability needs to be assessed. If a non-compete restriction would hinder your job search, I often suggest asking to be released from it while agreeing to continue observing restrictions against poaching customers, suppliers or staff.

Outplacement support

Some employers provide outplacement support. This usually includes guidance on finding another job, help preparing a CV, and interview support. The aim is to prepare you for the job market. You may want to ask your employer to include this in the agreement.

Other benefits you could ask for may include:

• Keeping your mobile phone or at least having the number ported over
• Being allowed to continue using your company car for a certain period
• An announcement to your former colleagues notifying them that you’re leaving

8. Get a free consultation at an early stage

Many law firms offer a free initial consultation if you’re being offered a settlement agreement. Why not take advantage of that?

The free consultation is an opportunity to get answers to some of your questions. Your solicitor will advise you on factors such as:

• The amount of compensation you should expect in the settlement agreement
• The most tax-efficient way to draft the agreement
• Whether you have any prospect of an employment tribunal claim against your employer and what the value of that claim would be

You will receive advice not only on the law and the settlement amount offered, but also on other benefits you may be able to achieve.

9. Make your counter-offer

Whether to negotiate by telephone or email depends partly on your relationship with your employer. A telephone conversation lets you hear each other’s tone and clarify misunderstandings straight away. Email gives you time to set out your request clearly, though it can sound more distant than intended. Whichever you choose, I usually recommend keeping the tone friendly.

If your solicitor has advised that you may have a claim, you can explain that without making the discussion confrontational: “My solicitor has advised that I may have an unfair dismissal claim, but I would prefer to resolve matters amicably.” We can often advise on any potential claims in a free initial consultation.

For more information about how to respond to your employer’s settlement agreement offer, read our guide to making a counter-offer, which includes a free template.

Use anchors

Anchors are parameters that set the frame of reference for the rest of the conversation.

Pick a figure you want, but that’s still sensible. If you ask for too much, you come across as naïve or unreasonable.

Now be quiet!

Silence can be a great weapon in any negotiation. Don’t over-explain what you want. By remaining quiet, you come across as much more confident.

Be reasonable

Listen to how your employer responds. Is there room for manoeuvre?

What are you willing to concede on to settle?

Listen to your employer

A good negotiator will put themselves in the other party’s shoes.

Ask open questions

Instead of launching into an argument, ask a few questions to find out what your employer really wants to achieve. What are their priorities?

For example, if your employer has proposed a termination date of the 30th November and you’d prefer to finish sooner, ask why they want you to finish on that date. What factors prevent them from ending your employment sooner?

By approaching your employer this way, you can understand their motivations and decide how best to negotiate.

Paraphrase their words back to them

Make sure you’ve understood your employer fully. Recap what they’ve said so they know you’re listening and taking them seriously.

10. Make every effort to reach a deal on the settlement agreement

There are several reasons why a settlement agreement is preferable to an employment tribunal claim. For example:

• It’s cheaper (in fact, your employer will usually pay your costs in full)
• It’s usually much quicker: a claim that proceeds to a tribunal hearing can take many months, sometimes considerably longer.
• It provides certainty (you can never be sure that you’ll win in  a tribunal)
• It’s less stressful (for most people, legal proceedings are distressing)

Whilst you shouldn’t under-settle, do your best to reach a mutually agreeable settlement if you can.

If you reach an agreement in principle, make sure you find out what happens next. The employer usually drafts the settlement agreement, but you may want to email them to restate what’s been agreed. This can help avoid confusion later.

Once they send you the settlement agreement for approval, read it and note any questions you may have. Then forward it to your solicitor for advice.

Clients sometimes ask how long negotiations take. This depends on the employer’s approach. In the negotiations I handle, employers usually reply to a counter-offer within a week, although reaching agreement and completing the paperwork may take longer.

Need Advice on a Settlement Agreement?

Before you sign, speak to an experienced settlement agreement solicitor.

Call 0330 333 6050 for a free initial consultation, or complete the form below and we will get back to you promptly.

We will explain your options, answer your initial questions, and guide you through the next steps. If you instruct us, your employer will usually contribute towards your legal fees, often covering the full cost of our advice.