Settlement Agreements – A Quick Solution for Your HR Problem? 

Businesses often experience HR issues, some are minor, low risk or straightforward to resolve, others present greater challenges. If your business is dealing with a difficult situation or employee or you are frustrated by the time and effort required to follow a particular process, a settlement agreement could be the easier answer to your HR problem. 

A settlement agreement is an alternative commercial route, that if both parties are willing, is often used to bring the employment relationship to an end on agreed terms. This can be beneficial to businesses in a wide variety of situations, for example in disciplinary cases where the business is unlikely to be able to secure a safe dismissal in the usual way, or where the business does not wish to undertake what could be a lengthy performance management process. Settlement agreements can also be a useful tool where there is a risk of a successful claim being brought against the business such as where harassment has occurred (and can be used whether or not the employee is to leave the business).

If a settlement agreement is an option you may wish to consider for your business, here are a few key things to be aware of:

1. What is a settlement agreement?
2. Why might settlement agreements be on the rise in future?
3. When it comes to settlement agreements, what should my first step be?

1. What is a settlement agreement?

In a nutshell, a settlement agreement is a legally binding contract voluntarily entered into by an employer and an employee in which it is agreed that in exchange for a sum of money the employee will not bring claims covered by the agreement against the employer. Often, the parties also agree that the settlement agreement will end the employment relationship, allowing a clean break. 

There are some legal requirements that need to be met for the agreement to be legally binding, including the employee receiving independent legal advice, and it is important that it is carefully and appropriately drafted to meet the needs of your business.

2. Why might settlement agreements be on the rise in future? 

Forthcoming changes to the law could see settlement agreements increase in popularity with businesses finding them a particularly useful tool in light of:

• The forthcoming reduction in the qualifying period for ordinary unfair dismissal. 

This will see the qualifying period drop from two years’ continuity of service to six months where the effective date of termination is on or after 1^st January 2027. 

As more employees will have ordinary unfair dismissal protection and sooner, there may be more situations in which a business is not able to safely get the outcome they want e.g. a safe dismissal, or not without following a fair and possibly lengthy process first which may not be desirable. Alternatively, a business may get caught out by the change to the law and may wish to consider a settlement agreement in light of a risk of an employment tribunal claim.

• The increase in the time limit to bring an employment tribunal claim. 

In measures expected to come into force on 1 October 2026, the extension of employment tribunal time limits is to double from three to six months. With a longer standard period in which to bring a claim, where there is a risk, some employers may prefer the peace of mind of a negotiated settlement agreement than an uncertain wait to see if a claim may be brought (and a potentially lengthy employment tribunal process).

• The removal of the statutory cap on the compensatory award for unfair dismissal. 

This is also taking place on 1^st January 2027, and there may be some situations in which this would influence an employer’s decision making, for example if there is a need to exit a highly paid senior employee and also a wish to protect the business from a potentially costly claim. A settlement agreement could allow the business to move from uncapped financial exposure to a fixed negotiated exit cost.

3. When it comes to settlement agreements, what should my first step be?

If you think a settlement agreement may be the way forward for a situation in your business, as a first step you should get in touch with us for specific advice, not least because it is important to ensure you have the necessary information before approaching the matter with the employee. There are rules around settlement agreements and settlement agreement conversations themselves so being aware of these, how they operate and any implications for your situation is vital.  

Kingfisher Professional Services Ltd has a specialist settlement agreement service available just for employers. We can advise you on the facts of your case, including settlement agreement discussions and the rules around these, draft a bespoke settlement agreement to meet your needs and negotiate with the employee’s representative on your behalf in accordance with your instructions.