Settlement Agreements and Capability Procedures

Take a settlement or go through a performance management procedure?

My employer has said I can leave now under a settlement agreement or I’ll be taken down a capability route, after which my employment might be terminated anyway.

What’s involved in a capability procedure and how long would it take? I’m thinking the settlement offer of two months’ pay plus my one month’s notice isn’t great.

What are the pros and cons and is it realistic to ask for a positive reference if my employer is expressing concerns about my performance? Any advice?”

Ian Carey Principal Solicitor at Careys Law answers…

Fair Reason

Capability is one of five potentially fair reasons that an employer can rely on for dismissing an employee (assuming you are eligible to bring an unfair dismissal claim, e.g. length of service requirements etc).

In broad terms, in order to fairly dismiss, an employer must show that they relied on a fair reason for dismissing you and that it was fair in all the circumstances to rely on that reason.

What does capability cover?

Capability dismissals relate to the employee’s capability or qualifications to do the job that they were employed to do.

They can relate to:

  • performance issues;
  • health issues – whilst performing at work or non-attendance;
  • failure to obtain relevant qualifications; or
  • removal of professional memberships.

Based on your question, it would appear that your employer would be seeking to rely on their concerns of poor performance to justify dismissing you for the lack of capability.

What is meant by a capability route?

Taking an employee down a capability route basically means following a capability procedure which in your case is the way in which an employer can obtain sufficient evidence to demonstrate that they held a genuine and reasonable belief of your poor performance.

It is important to note that your employer need not prove that you were actually poorly performing but only that they held a genuine and reasonable belief of that fact.

What is the purpose of following a capability procedure?

The purpose of the procedure is to address the concerns regarding your performance and consider ways in which you and your employer can work together to improve your performance to an acceptable level. It can also be a good opportunity to consider whether you would benefit from any additional assistance, training or changes that may assist you in improving your performance.

What does following a capability procedure involve?

A capability procedure involves following a set procedure to address the employer’s concerns regarding the employee’s poor performance with the employee. Different employers may have different procedures depending on the size of the organisation, whether there has been union involvement in drafting the procedure, the type of sector in which the business operates and historical/ previous processes that may have been followed in the past.

Common features of capability procedures are:

  • Review period
  • Written warnings – information relating to poor performance, targets for improvement and timescale, identifying need for additional support e.g. training or supervision/mentoring
  • Holding the capability meeting to allow both sides to discuss respective positions with a view to agreeing an improved performance plan
  • Inviting the employee to a capability meeting
  • Informal resolution – where appropriate
  • Initial assessment/ investigation
  • Further capability meetings
  • Final written warning
  • Dismissal
  • Appeals – each stage including issuing of warnings
  • Medical assessment where applicable
  • Reasonable adjustments where applicable e.g. disabled employee

How long would it take to follow a capability procedure?

  • This will depend on many factors such as:
  • The nature of the poor performance and how serious it is to the business – which entry point of the capability procedure is the employer starting with
  • The complexity of the investigation/ initial assessment stage
  • Length of service – the longer an employee has been employed, then possibly the longer they should be given to improve (especially if an employer has previously been reticent in addressing the performance issue/ previously given the employee good appraisals)
  • The reason for the poor performance – is it due to a fundamental change in the employer’s processes e.g. new system or requirements? May necessitate a longer process if so
  • The extent to which an employee utilises the appeal process at each stage
  • Whether the poor performance is linked to a medical condition and/or medical treatment and/or the need for medical advice/ occupational health reports
  • Generally speaking, in a straightforward case a capability procedure could be completed in around 2 months or so but it could take longer in more complex cases, possibly up to 6 months if every appeal stage is utilised and training is required or the poor performance is disability related.

What are the pros and cons of a settlement agreement vs capability procedure?



  • Certain outcome – look for new start/new job
  • Quick & easier resolution/ less stressful
  • Can negotiate favourable terms e.g. reference
  • More money than ET award
  • No significant legal costs
  • New job = increase in income


  • Leaving job prematurely before time
  • Fixed award may be less then ET award
  • Waiving all rights to pursue all claims
  • No closure or cathartic process/hearing
  • Other legal obligations – Restrictive Covenants etc.
  • No guarantee of a new job = no income



  • Possible outcome – improve & stay in job
  • Still able to pursue claims in ET if unfair
  • Procedure may be cathartic/ give closure
  • More time to look for new job
  • Easier to get a new job whilst in a job


  • Stressful – accepting criticisms
  • Employer – good evidence to defend ET
  • May be futile and will still lose job
  • Employer – lip service to fair process
  • Length of time taken – uncertainty
  • Humiliating in front of colleagues
  • May damage work relationships

Is an offer of two months’ pay plus one month’s notice pay worth accepting?

This isn’t an easy question to answer because much will depend on the relevant circumstances of the case and in particular, the strength of your employer’s evidence regarding your poor performance. Often employers make snap judgements about an employee’s competence or an incident will occur which will be the straw that broke the camel’s back and so the employer’s case may be based on gut feeling and irrational decision-making rather than clear and cogent evidence.

Other factors are the likelihood of you securing a new job and the basis of your poor performance. If you have skills that are in demand, then there is less risk in leaving a job with 3 months’ money if you are confident of securing another job within that timescale especially in a rising market where you are more likely to secure a better package.

On the other hand, if the poor performance is disability-related and you are not confident of securing a new job easily, then this would necessitate negotiating a better deal or fighting your corner through the capability procedure with the option of bringing an ET claim in the future.

Is it realistic to ask for a positive reference if my employer is expressing concerns regarding my performance?

Yes but it depends on the circumstances. In our experience, smaller employers tend to be more cavalier about giving references and may do so provided the employee is leaving under a settlement agreement and they aren’t facing an ET claim.

Even if an employer is reluctant to do so, most employers can be persuaded to provide a basic factual reference and in any event these are now becoming the norm anyway.

We always seek to get the best outcome for our clients and that usually includes seeking a reference to secure the employee’s prospects of future employment.

By Ian Carey, Employment Solicitor at Careys Law.

Answer given on 16 June 2015.

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.

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