9 Steps to Negotiating a Better Settlement Agreement (2024)

Do you want to negotiate a better deal on your settlement agreement?

Often an employer will offer an employee a sum of money, expecting them to come back and make a counter-offer. 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 a response straight away. What should you do?

Take your time

Our advice is that you ask 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 days to consider a settlement offer. Although this isn’t required by law, it is something that all employers should consider.

This gives you time to:

• think about what you’ve been offered;
• obtain legal advice; and
• prepare a response

Think about your best-case scenario

Be an idealist for a moment!

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

Now consider your worst-case scenario

What’s the least that you’d settle for?

Deciding your bottom limit is important as it ensures you’re not a pushover!

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. A settlement agreement is a really good opportunity to negotiate a fantastic reference. You could even write it yourself and ask your employer to endorse it! It will really help you and won’t cost your employer a penny!

Similarly, there may be some factors that are crucial for your employer that you’re not too bothered about. For instance, employers usually like to keep termination payments confidential. As part of the settlement agreement, you can agree not to breathe a word about the deal to anyone. Most employees are happy with that.

When considering what counter-offer to make, take some time to think about what you really want in the settlement. Give careful thought to the best-case scenario.

At the same time, think about your worst-case scenario. What’s your bottom line for an acceptable settlement? If you’re able to answer these questions, you’ll be much better placed to begin the settlement agreement negotiation process.

2. Decide which negotiation tactics to use

Why should your employer accept your counter-offer?

Most companies won’t want to pay staff any more than the law requires. You need to consider your employer’s incentive to pay you a higher financial settlement. Why should they be open to negotiation?

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 money is that, in return, you will agree not to pursue any 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 be awarded in an employment tribunal.

Essentially, you’re saying to your employer, “Unless you pay me more money, I’m taking you to a tribunal!”

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 want to approach the negotiations in this way, make sure you get legal advice from an employment solicitor who can advise you on your rights.

2. Goodwill

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 does not require them to pay you any more than they are already offering in the proposed agreement.

This is most likely to be the case where:

• you’ve been employed for under two years
• you’re being offered a settlement agreement as an alternative to redundancy.

However, it may be that you can get a better offer by doing the settlement agreement negotiation on the basis of goodwill. There may not be any commercial incentive for them to pay you more, but they may genuinely want to be helpful and show gratitude for your 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 thecompany

These tactics often work better with smaller companies where there’s a family feel to the business. If you don’t have this kind of relationship with your employer, this approach to negotiation may not be appropriate.

3. Ask for a Protected Conversation with your Employer

Your employer should ideally make the settlement offer in the context of a protected conversation. Discussions in a protected conversation are generally ‘off the record’. That allows both you and your employer to speak freely without worrying that the other party will use their words against them. 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. You should not presume that you will get the same.

There are a number of factors that 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

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.

There’s no harm in making a counter-offer that is at the top end of what you can reasonably expect. 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 of money, 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 lead to you getting less than you should. This may mean that you experience financial difficulties unnecessarily.

Be confident in asking for what you’re entitled to. Be respectful and courteous in your communications but don’t sell yourself short. Be prepared to justify why you’re asking for a certain sum of money. For example, you could explain to your employer the difficulties you will face as a result of losing your job and how long it’s likely to take you to find another one.

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 find you don’t receive as much money as you expected.

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

As a general rule, a termination payment is tax-free for up to £30,000. This includes any statutory redundancy payment.

However, most other payments, such as a 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 of money you receive is clearly going to be important, particularly if your employment is coming to an end.

However, there are other factors that you should take into account when negotiating.

For example, a settlement agreement is a good opportunity to agree on a fantastic reference with your employer. There is no law requiring an employer to give a reference. However, even if your employer is unable or unwilling to pay you more money, it won’t cost them anything to provide you with a positive reference. This can then be annexed to the agreement.

If your employment contract contains 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. This will help you in your search for alternative employment.

Some employers provide outplacement support. This usually consists of guidance with finding another job, assistancewith preparing a CV and help with interviews. The aim is to prepare you for the job market. You may want to ask your employer to include this as part of 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 be entitled to 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 financial amount offered in the settlement, but also other benefits you may be able to achieve.

9. Make your counter-offer

When you’ve thought everything through and obtained legal advice, it’s time to make your counter-offer. You can do this verbally or in writing.

If you’re making your counter-offer in writing, it is usually best to do that by email. For more information about how to do that, read our guide to making a counter-offer, which includes a free template.

However, there are advantages to negotiating verbally. For example, it helps to maintain rapport and empathy. Here are some tips if you’re negotiating verbally.

Use anchors

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

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

But still make sure it’s your best offer.

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 reach a settlement?

Listen to your employer

A good negotiator will put themselves into the shoes of the other party.

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 are the factors that prevent them from ending your employment sooner?

By approaching your employer this way, you can determine their motivations and decide how best to approach the negotiation.

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 much quicker (a tribunal claim is likely to take about a year)
• 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.

11. Agree on next steps . . .

If you reach an agreement in principle, make sure you find out what happens next. It’s usually the job of the employer to draft the settlement agreement, but you may want to email your employer just to re-state what has been agreed. This can help avoid confusion at a later date.

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

Would You Like a Free Consultation About Your Settlement Agreement?

If you’ve received a settlement agreement, you’ll need to make sure you receive legal advice on it.

We advise clients throughout the UK. Call us now for a free consultation.

From a landline: 0800 531 6050

From a mobile: 0330 333 6050

Alternatively, complete the form below and we’ll contact you.