Employers sometimes use settlement agreements as a practical way to bring an employment relationship to an agreed end. Under a settlement agreement, the employee agrees to waive specified employment claims, usually in return for a financial package.

The package may include salary up to the termination date, payment for accrued but untaken holiday, other contractual entitlements and a termination payment. The amount and structure of any additional payment will usually be subject to negotiation. Employers will also generally contribute towards the employee’s legal fees (normally around £500) because, for the agreement to be valid, the employee must receive advice from an independent adviser.

However, you must take care when initiating settlement discussions, because if negotiations break down, the employee may try to use the discussion to support a claim.

Settlement discussions may be protected by the “without prejudice” rule or by section 111A of the Employment Rights Act 1996. These protections are different:

The without prejudice rule normally requires an existing dispute and a genuine attempt to settle it. Simply describing a conversation as “without prejudice” does not automatically protect it. Section 111A allows confidential pre-termination negotiations to take place even where there is no existing dispute. However, its protection generally applies only to ordinary unfair dismissal claims and may be lost where there has been improper behaviour.

In a recent case of Tarbuc v Martello Piling Ltd [2026] the employee was invited to a meeting at which he was offered a settlement agreement and was told if he refused, he would be made redundant. He was dismissed and brought 3 claims – unfair dismissal, unlawful deduction of wages and part-time worker discrimination. The Employment Appeal Tribunal confirmed that section 111A did not prevent evidence of the discussion from being used in connection with the wages and part-time worker claims.

Settlement agreements can provide an effective way to resolve workplace issues, but the initial approach must be planned carefully. Before opening discussions, you should assess the potential claims, decide which legal protections may apply and consider how the proposal should be presented.

The NFU Employment Service Helpline can provide initial advice and guidance. If you need more hands-on support, our fee-based consultancy service can assist with planning and conducting protected conversations, negotiating terms, drafting the settlement agreement and liaising with the employee’s solicitor through to completion.

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