When settlement agreements are used

A settlement offer doesn’t always follow a dispute. Sometimes it’s made to prevent one. The classic scenario is where you raise complaints about bullying, discrimination, harassment, or other sensitive issues, and your employer proposes a settlement early on.

From the employer’s perspective, early settlement limits disruption, contains internal fallout, and reduces the risk of an Employment Tribunal claim. In other words, a settlement is often less about ending a fight than avoiding one altogether.

Performance issues

Suppose your employer says your performance isn’t meeting expectations. You could be put through a formal capability process with performance improvement plans (PIPs), targets, and reviews. But, as far as they see it, that’s potentially a hell of a lot of management hours to commit to an exercise that may or may not deliver results.

From the employer’s perspective, it’s often more efficient to offer a mutual exit. From your perspective, it can be a dignified way to leave, without the stress or stigma of a formal process. In essence, it’s a quid pro quo: the employer avoids the cost and risk of a potential unfair dismissal claim, while you move on quietly with a settlement payment, your reputation intact, and usually a neutral or even positive reference.

Restructuring the business

A common non-dispute scenario for using a settlement agreement is when an employer is restructuring the business. Restructuring is the business decision; redundancy is often the consequence. Not every restructure leads to job losses, but many do, especially when the goal is to reduce costs or streamline operations.

We’ll look at redundancy in more detail later in this guide. For now, it’s worth noting that, from an employer’s perspective, redundancy is one of the most complex and time-consuming employee processes. Even when handled properly it’s expensive; when handled poorly, it can expose the employer to significant legal risk and Employment Tribunal claims, particularly where a bunch of employees feel they’ve been treated unfairly.

Long-term sick leave

If you’ve been on long-term sick leave with no clear return date, your employer may propose a settlement agreement rather than start formal capability or absence management procedures. For the employer, settlement offers closure and helps manage both the legal and practical risks linked to ongoing sickness absence, especially around disability discrimination and reasonable adjustments.

For you, it can provide financial certainty and a dignified way to move on if returning to work isn’t realistic, without the stress of repeated reviews or medical assessments.

Disciplinary or misconduct concerns

There’s also the situation that turns the usual dispute scenario on its head. So, instead of the employee raising issues, it’s the employer who has concerns. Allegations of misconduct may have arisen, and they’re not entirely without basis. We’re not necessarily talking about theft or gross dishonesty. Misconduct can cover a wide range of behaviour, from performance-related lapses to breaches of policy or inappropriate conduct.

In such cases, both parties may prefer a discreet and managed exit rather than a formal disciplinary process with an uncertain outcome. This is particularly true in sectors where professional reputation matters, or where a public finding of misconduct could have lasting consequences. A settlement agreement provides a clean break that protects both sides’ reputations.

In summary

Employers make settlement agreement offers for many reasons, but they all come down to control and cost. A settlement gives them certainty, draws a line under risk, and frees up management time to focus on the business instead of disputes. Whether it’s performance concerns, restructuring, sickness, or potential misconduct, the goal is the same: to reach a clean, managed exit before problems grow. For you, understanding why the offer is on the table helps you see what the employer values most, and that’s often where your leverage lies.