Employers: Ask an Expert

Q: I’ve got an employee who’s been with us for 2 years but in the last year his performance has dropped off to an unsatisfactory level.  Can I offer him a settlement agreement to leave without having to go through a long process to deal with the performance problem?

Paul Reeves, partner in the employment team at Stephenson Harwood LLP answers…

The short answer is yes you can, but there are a few points to note.  Offering a settlement agreement (formerly called compromise agreements) will require you giving this individual something more than his/her contract provides (e.g. a settlement sum, the first £30,000 of a genuine settlement sum may be paid free of tax).  Do you really want to be paying a sum to an under-performing employee?  The advantage of a settlement agreement is that in return for a payment the employee waives their employment rights.

The alternative is to follow the procedure as set out in the ACAS Code of Practice (which is the minimum benchmark) when dealing with performance issues.  By following this process you should avoid the need to offer a settlement agreement or pay this employee off.

If you want to offer a settlement agreement, then note the following.  Since July 2013, employers now have the option to hold pre-termination discussions with employees about them potentially leaving.  A pre-termination discussion is essentially an “off the record” conversation between the employer and employee.  The law now provides that if you meet the conditions of a pre-termination discussion, then anything said during those discussions cannot be referred to any subsequent litigation (i.e. if an agreement is not reached and a claim is brought by the ex-employee).  Pre-termination discussions are an alternative to the long established “without prejudice” (WP) discussions.  

The key difference between the two is that for a genuine WP conversation there must be a pre-existing dispute between the parties. A genuine WP conversation will be treated as off the record conversation and therefore not admissible in any subsequent litigation. Either a WP or pre termination discussion enables the parties to have a frank discussion with a view to agreeing exit terms.  It is important to note that the protection afforded through pre-termination discussions is useful if the individual only has an unfair dismissal claim.  If there is potential for claims for discrimination or whistleblowing (even if linked to unfair dismissal) then you will need to use the WP route and not a pre-termination discussion.

If you use the pre-termination discussion route, then the offer must be in writing and the individual must be given time to consider it.  This “cooling off” period must be for at least 10 days.

The employee must obtain independent advice (e.g. from a solicitor) before entering into any settlement agreement – there is no obligation for the employer to pay for this advice though many do, up to a limit of a few hundred pounds only.  The settlement agreement until it is signed must be marked “without prejudice, subject to contract”.

If the employee does not wish to enter into a pre-termination discussion, or after having reviewed the proposed offer decides not to proceed, then the employer needs to commence the performance management process in line with either their own policy or as a minimum the ACAS Code.

A settlement agreement is essentially a way of avoiding the time and expense of following the performance process.  Best practice to engage with the employee who has not been performing, sooner rather than later to allow them adequate time to improve.  Failing to follow the correct procedure and dismissing the employee as a result of his/her performance may lead to an unfair dismissal claim.  If the employment tribunal finds that the employer has dismissed the employee for an unlawful reason and has not followed a fair process, it may uplift any award it makes by up to 25%, subject to any statutory cap on awards.  So following a fair process is key.

It is important to note that the performance management process does not take as long as employers may fear and is unlikely to have lasted for the 12 months the employer states the employee has been under-performing in this scenario.  If having been warned an employee’s performance does not improve within a reasonable timescale, then the employer can lawfully terminate the employee’s employment.  This would avoid the need for a settlement agreement and paying the individual a sum for entering the agreement (i.e. paying the individual for poor performance).

It is worth noting that employees whose employment started on or after 6 April 2012 are now required to accrue 2 years’ service before they can bring a claim for unfair dismissal.  Those employed before that date only need one year’s service to be eligible to bring a claim unfair dismissal.  

Answer given by Solicitor Paul Reeves on 2 October 2013.


IMPORTANT: The contents of this page are for guidance only and do not constitute legal advice. You should consult a solicitor without delay if you require legal advice on a particular employment matter.

helping employees with settlement agreements since 2013