Quick answer:
If your employer offers you a choice between a Performance Improvement Plan (PIP) and a settlement agreement, there’s no single right answer as to which route you should take — it depends on your confidence in finding a new job, the strength of the employer’s performance evidence, and how much the settlement offer is worth compared to staying and fighting your corner. A PIP gives you a potential to keep your job and preserve your right to bring an employment tribunal (ET) claim if things go wrong. A PIP also allows you longer to look for a job while you’re in a job but most people will find a PIP stressful. A settlement agreement gives you certainty, closure, a financial payment, and a clean exit without the stress and stain of a PIP — but it ends your employment and waives your legal claims.
What is a PIP?
A Performance Improvement Plan (PIP) is the practical tool employers use within a capability procedure — the formal process for addressing concerns about an employee’s performance. A PIP typically sets specific targets, a timescale (often lasting up to 12 weeks but sometimes longer), and support measures (training, supervision, or mentoring) to help you reach an acceptable standard. Failure to hit those targets can lead to a formal warnings and, ultimately, dismissal for capability reasons.
What is a settlement agreement in this context?
A settlement agreement is a legally binding contract where (usually) you agree to leave your job in exchange for a termination payment and agreed terms (such as a reference) — in return for waiving your right to bring most employment claims, including unfair dismissal. Employers often offer one as an alternative to starting a PIP, effectively letting you skip the performance process altogether. A settlement agreement solicitor can advise you on the proposed terms.
PIP vs Settlement Agreement: Comparison
| PIP (Capability Procedure) | Settlement Agreement | |
| Outcome | Chance to improve and keep your job, or possible dismissal for capability. | Certain exit, agreed terms |
| Timeframe | Weeks to months (often 3–6 months) | Days to a few weeks |
| Legal rights | Preserved — can still claim employment tribunal claims, e.g. unfair dismissal. | Waived — you give up your right to claim. Usually comes with confidentiality clauses / NDAs – and a promise you won’t badmouth. |
| Stress/pressure | Ongoing scrutiny, reviews, warnings | One short process to negotiate and sign-off the agreement, then closure. |
| Financial outcome | No guaranteed payment but usually you will still be entitled to your notice if your employer decides to dismiss you. | Guaranteed payment (usually a tax-free ex-gratia termination payment + notice / PILON). |
| Reference | If dismissed, usually no right to a reference, a risk of a negative reference, although many employers only give a standard factual reference unless you’re in a regulated role requiring them to give more. | Can often be negotiated as part of the deal. |
| Best suited to | Those confident they can improve, those that can handle the pressure of a PIP and or want to preserve claim options or believe going through a PIP will deliver a better financial or a chance to secure a new job while in work. | Those who want certainty, low stress, have a new job lined up or believe they can secure one in a reasonable timeframe, or don’t want to relive the process. |
Key questions to ask before deciding
Is the settlement offer fair?
Compare it to what you’d likely get in wages during the PIP, notice pay and the strength of any potential tribunal claim. Factor in the benefits of a PIP, and accelerated receipt of a lump sum payment.
How strong is the employer’s performance evidence?
Put another way, do you accept your performance is below where it should be, and if so, do you think you can improve it to the required level? Employers are entitled to expect a satisfactory level of performance. To defend an unfair dismissal claims, an employer needs a genuine and reasonable belief of poor performance, to show they have followed a fair performance procedure and that they acted reasonably in deciding the treat the poor performance as sufficient to dismiss.
If any of the following apply, you may have a better chance of pushing for the PIP to be stopped or extended, and / or bringing employment claims:
- the evidence does not support your performance being below the required standard.
- the employer is not following its own procedures regarding PIPs or performance management, sometimes called a Capability Procedure.
- there is inconsistency in terms of the expectations being placed on your compared to colleagues of a comparable role and seniority.
- external factors outside your control are resulting in the performance issue, i.e. sales figures are low due to a recessionary environment.
- your employer has not provided reasonable support, training or resources necessary for you to do your job.
- you have a disability and your employer has failed to make reasonable adjustments which is impacting on your performance.
- the process has been rushed.
- There is evidence something else is or might be the effective cause of your employer wanting to exit you from the organisation, e.g. whistleblowing.
How employable are you right now?
If you’re confident of finding another role quickly, at a commensurate level of income and benefits package, taking the settlement and moving on is often the lower-stress option. If the market is tough or your performance issues are linked to a disability or health condition, staying and using the capability procedure (with reasonable adjustments) may protect you better. One option may be to do some research on the market in your area, for example by reviewing job boards and speaking to specialist recruiters about the job market, on a confidential basis.
Do you want a reference?
This is often negotiable in a settlement agreement, even where performance concerns have been raised — particularly with smaller employers.
What additional pay and benefits will you receive if you turn down the settlement offer and go through a PIP?
While it is impossible to know for sure how long a PIP will last, and ultimately that’s a decision for your employer, you can model potential outcomes, for example, how much salary, commission, bonuses, share options or stock options, and pension contributions will you accrue it you remain employed for say 2,3,4,5 or 6 months and how does the settlement agreement package compare to those scenarios.
Don’t forget benefits such as restricted stock options (RSUs) or shares or share options, as it may be hanging tight during the PIP might mean these vest, compared to leaving earlier under a settlement agreement.
Is your wellbeing and mental health more important than financial considerations?
There’s more to life than money, and different people, at different times of their life, will have different priorities. Know thyself, and make an informed personal decision with the benefit of specialist settlement agreement legal advice.
FAQs
No. A settlement agreement is voluntary — you cannot be forced to sign one, and you should take independent legal advice before doing so (this is a legal requirement for the agreement to be valid).
Not necessarily, but it’s the likely next step if your employer has genuine performance concerns and wants to address them formally rather than drop the matter.
Yes you can try and secure better terms. Depending on your circumstances, your employer may be amenable to offering you more to avoid the time and management burden of running a capability procedure. However, don’t assume the first offer is an invitation to negotiate. Assess the offer properly and consultant a specialist settlement agreement solicitor, it might be very reasonable taking into account your circumstances
No — but it significantly increases the risk and tends to be outcome. A fair process, reasonable targets, and proper support are all required before dismissal for capability reasons.
This depends on several factors and how ready your employer is. You’d expect your manager to put together a PIP document setting out the areas of concern clearly with smart goals, i.e. specific, measurable, achievable, relevant, and time-bound. If the draft plan is vague, unclear and unjustifiable, consider pushing back and not signing it until it’s revised.
In my experience as a settlement agreement solicitor advising employees on settlement agreements versus a performance improvement plan, most people accept the settlement if it provides a sufficient financial package to give them runway to secure a new role. For this reason it’s not unusual for employees work out how many months usual take-home pay the total settlement payments package gives them.
Legal Disclaimer
The contents of this article are intended to be for general information purposes only and do not amount to (nor are they intended to be) legal, tax or financial advice or a complete or authoritative statement of the law nor should they be treated as such. No warranty or promise is given, express or implied, as to accuracy of the information on this page and no liability is accepted for any error or omission. You should instruct a specialist employment solicitor to advise you on your particular situation and not act or rely on the information on this page.
If you’ve been offered a settlement agreement or placed on a PIP, speak to a specialist employment solicitor before deciding.
Related reading: Settlement Agreements and Capability Procedures — our in-depth guide on how capability procedures work, timelines, and pros/cons in detail.
