Expecting a UK Settlement Agreement: Signs and Preparation

Last updated: 2 May 2026

A settlement agreement is a legally binding contract under which an employee waives the right to bring specified employment tribunal claims in exchange for agreed terms, most commonly a financial payment. In the UK, settlement agreements are governed by section 203 of the Employment Rights Act 1996. The most common scenario is a negotiated exit from employment, typically resulting in a tax-advantaged lump sum under section 401 of the Income Tax (Earnings and Pensions) Act 2003.

This guide is for employees who have not yet received a formal offer but believe one may be coming, whether because of a redundancy process, a performance review that feels disproportionate, or a conversation that hinted at a "mutual parting of ways". It covers how to read the signals, what to do in each scenario, and how to position yourself before the offer lands.

What signals that a settlement agreement is coming?

The clearest signals are a formal redundancy consultation, a performance improvement plan that feels disproportionate, an HR meeting that references a "way forward" or "mutual agreement", or a manager asking to speak with you "off the record". Any one of these warrants early preparation, even if no offer has been made.

Employers rarely announce a settlement agreement in advance. Instead, the process tends to follow a recognisable pattern. A role is put "at risk". A PIP is launched with targets that feel unachievable. A grievance you raised is met with a counter-proposal rather than an investigation. A restructure is announced that happens to affect only your team. None of these events guarantees an offer, but each one shifts the probability.

Pay attention to changes in how you are treated day to day. Being excluded from meetings you previously attended, having your responsibilities quietly reduced, or being asked to hand over client relationships are all soft signals. They are not evidence of wrongdoing on their own, but they are worth noting in a dated log.

What to do during redundancy consultation?

During redundancy consultation, your employer is legally required to consult with you meaningfully before any decision is made final. Under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, collective consultation applies when 20 or more redundancies are proposed. For individual redundancies, the duty to consult comes from the general unfair dismissal framework under the Employment Rights Act 1996.

Use the consultation period actively. Ask for the selection criteria in writing. Request the scoring matrix if a pool of employees is being assessed. If you believe the criteria are being applied unfairly or that your role is not genuinely redundant, say so in writing during the consultation. This creates a paper trail that can support a stronger negotiating position later.

A settlement agreement offered during redundancy consultation may include:

• Statutory redundancy pay (calculated under section 162 of the Employment Rights Act 1996)
• Enhanced redundancy pay above the statutory minimum
• Payment in lieu of notice (PILON), which is subject to income tax and National Insurance under the post-April 2018 PENP rules
• A contribution to your legal fees for independent advice
• An agreed reference

Do not sign anything during the consultation period without independent legal advice. The agreement is not valid unless you have received that advice from a qualified adviser, as required by section 203(3) of the Employment Rights Act 1996.

What to do if you are placed on a PIP?

A performance improvement plan is not automatically a precursor to a settlement agreement, but it is one of the most common pre-offer signals in practice. If the targets in your PIP are vague, the timescales are very short, or the process began shortly after you raised a concern, the PIP may be functioning as a managed exit route rather than a genuine attempt to improve your performance.

Your first step is to engage with the PIP formally and in writing. Respond to each target. Ask for clarification where targets are unclear. Request regular written updates on your progress. This approach serves two purposes: it demonstrates good faith, and it creates a written record that can be used in negotiations or tribunal proceedings if the process later proves to have been unfair.

If you believe the PIP is being used to manufacture grounds for dismissal, consider whether you have a potential claim. Employees with two or more years of continuous service have unfair dismissal protection under section 94 of the Employment Rights Act 1996. Employees with fewer than two years may still have day-one rights if the PIP is connected to a protected characteristic under the Equality Act 2010, or to whistleblowing under the Public Interest Disclosure Act 1998.

The strength of any underlying claim is one of the key factors that determines the size of a settlement offer. Taking legal advice while you are on a PIP, rather than after an offer arrives, gives you more time to assess that strength.

What does without prejudice mean?

Without prejudice is a legal rule that protects genuine settlement discussions from being disclosed in tribunal or court proceedings. If a conversation or letter is properly marked "without prejudice", neither party can rely on what was said in that exchange as evidence of liability. The rule exists to encourage frank settlement discussions.

In employment law, a related but distinct concept is the protected conversation, introduced by section 111A of the Employment Rights Act 1996. A protected conversation allows an employer to propose a settlement even before any formal dispute has arisen, and the content of that conversation cannot be used in an ordinary unfair dismissal claim. However, the protection does not apply to claims involving automatic unfair dismissal (such as whistleblowing), discrimination, or improper behaviour during the conversation itself.

If your employer asks to speak with you "off the record" or invites you to a meeting described as a "without prejudice" or "protected" conversation, you are not obliged to attend without preparation. You can ask for the purpose of the meeting in advance. You can also ask for time to take legal advice before the conversation takes place. ACAS guidance confirms that employees should not feel pressured into accepting an offer made in a protected conversation.

What you say in a without-prejudice conversation can still affect the negotiation. Avoid making statements about what you would or would not accept until you have taken advice.

What to gather before the offer arrives?

Gathering the right documents before an offer lands means your solicitor can assess the terms quickly and accurately. The most important documents are your employment contract, any subsequent variation letters, your most recent 12 weeks of payslips, and any bonus or commission scheme rules that apply to you.

Beyond pay documents, collect the following:

• Share plan documentation: If you hold options or shares under an employer scheme, the rules governing what happens on termination are often buried in the plan rules rather than your contract. These can represent significant value.
• Written communications: Emails, letters, or messages relating to your performance, your role, or the circumstances that may lead to an offer. Save these to a personal device or personal email address, subject to any restrictions in your contract.
• Your grievance or complaint records: If you have raised a concern formally or informally, keep copies of what you said and the response you received.
• Your benefits summary: Private medical insurance, life assurance, pension contributions, car allowance, and other benefits all have a monetary value that should be reflected in any settlement.
• A factual chronology: A dated, factual log of events relevant to your situation. Written in plain language, without emotional commentary.

Be careful about how you copy documents. Your employment contract may contain restrictions on removing confidential information. As a general rule, documents that relate directly to your own employment (your contract, your payslips, your performance reviews) are safe to retain. Documents belonging to clients or third parties are not.

Should you make the first move?

An employee can initiate a settlement discussion. There is no rule that says the employer must go first. Whether doing so is in your interests depends on your specific circumstances, the strength of any underlying claim, and how you frame the approach.

Making the first move can be advantageous if you have a strong claim and your employer does not yet know you intend to pursue it. A well-framed without-prejudice letter that sets out the legal basis for your position can prompt a serious offer. It can also accelerate an exit that both parties want but neither has formalised.

The risks are real, however. If you approach your employer without legal advice and frame the conversation poorly, you may signal that you are willing to leave on terms that undervalue your position. You may also inadvertently waive the protection of a without-prejudice conversation if the approach is not handled correctly.

The safest approach is to take legal advice before initiating any conversation. A solicitor can help you decide whether to make the first move, how to frame it, and what opening position to take. The cost of that advice is almost always lower than the cost of a poorly handled opening.