Settlement agreement after a performance process

A performance process that is going nowhere costs the employer months of management time and a dismissal at the end that may still be challenged, and a settlement agreement offers both sides a cleaner ending: the employee leaves with a payment and a reference, the employer avoids the rest of the process and the claim. The agreement has to be offered in a way the law protects, after enough process that the employee's claims are weak, with a package that uses the tax exemption and a narrative both sides can live with. I draft the agreement for the employer for a fixed fee of £795, delivered in three working days, with a note on the conversation; a version including negotiation with the employee's adviser is £995.

Who this is for

Employers in England and Wales with an employee on a performance improvement plan, in a capability process or in a role that is not working, who want to offer an agreed exit.

What matters in a performance exit settlement agreement

The point at which settlement beats continuing

A capability dismissal is fair only after warnings, targets, support and time to improve, which takes months, and the employer should weigh the cost of continuing (management time, the effect on the team, the risk of a claim at the end) against the cost of settling now (a payment, a reference); the point at which settlement beats continuing is usually after the first formal stage, when the process has established the shortfall and the employee has understood that the role is at risk, and the note that comes with the agreement helps the employer judge it, because an offer made too early looks like a pretext and one made too late has cost what it was meant to save.

The protected conversation and the limits on it

Section 111A of the Employment Rights Act 1996 allows the employer to propose an exit in a conversation that cannot be referred to in an ordinary unfair dismissal claim, which suits a performance exit where no dispute exists yet, provided the Acas Code of Practice on settlement agreements is followed (a written offer, a reasonable time to consider it, no undue pressure, no improper behaviour); the protection does not cover discrimination claims, so where the employee's performance may be connected to a disability, pregnancy or another protected characteristic, the conversation should be approached as without prejudice on the basis of a genuine dispute, and the note explains the difference and the words to use.

The evidence the employer should have before it offers

Before offering, the employer should have the record that would support a capability dismissal if the offer is refused: the objectives set, the feedback given, the formal meetings held, the support offered, the improvement expected and the shortfall measured; the offer is stronger when the employee can see that the alternative is a process that will end the same way, and the employer should also have considered whether the performance has a cause the law protects (a disability needing adjustments under the Equality Act 2010, a health condition, a complaint the employee has raised), because an exit offered to an employee who has just raised a grievance is a different conversation.

The package for a capability exit and the tax

The package for a performance exit is usually notice (paid in lieu, or garden leave), accrued holiday, and a compensation payment reflecting the cost of the process avoided and the risk of a claim (often a few months' salary), with any bonus addressed under the plan's terms; the compensation falls within the thirty thousand pound exemption under section 403 of the Income Tax (Earnings and Pensions) Act 2003 while notice pay is taxed as earnings under section 402B, and the agreement allocates the sums, contains the tax indemnity and provides for the employer's contribution to the adviser's fees under section 413A; the accountants confirm the treatment.

The claims the employee could bring and the waiver

The agreement waives the claims under the conditions in section 203 of the Employment Rights Act 1996 and section 147 of the Equality Act 2010: unfair dismissal (constructive or actual), discrimination, unlawful deductions, breach of contract, and the claims the employee's circumstances suggest, listed specifically, with the Employment Rights Act 2025 changes to the qualifying period for unfair dismissal reflected on the timetable the regulations set; the employee receives independent advice, the adviser certifies it, and the agreement contains the employee's warranties that no claims have been issued and that the employer has been told of any circumstances that might give rise to one.

The reference, the narrative and the terms that make an exit acceptable

An employee leaving a performance process cares about the reference and the story, and the agreement should attach an agreed factual reference, agree the internal and external narrative (a mutual decision, a new direction), impose mutual non-derogatory and confidentiality terms within the limits the law sets (protected disclosures under section 43J of the Employment Rights Act 1996 and the Employment Rights Act 2025 provisions on non-disclosure terms concerning harassment and discrimination on the timetable the regulations set), provide for the return of property and the handover, and reaffirm any restrictive covenants that matter; the terms that cost the employer nothing are often what makes the employee sign.

What it costs

Settlement agreement, £795. Drafted for your situation, with a note on how to have the conversation. Three working days.

Settlement agreement including reasonable negotiation with the employee's adviser, £995. The agreement in three working days. The negotiation then runs until the agreement is signed or it becomes clear it will not settle. Reasonable negotiation means what, in my experience, amounts to the standard back and forth on a settlement agreement. If the employee or their adviser is being unreasonable, for example by conducting themselves unprofessionally or requiring a substantial rewrite that needs material further legal advice to you, I will flag it and we will discuss how best to proceed, which may involve further fixed-fee work. That would be unusual.

Buying online forms the engagement on payment. The scope is what the settlement agreements for employers page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke settlement agreement drafted for the exit you are dealing with
• Proper waiver of the relevant statutory claims, so the agreement does what you are paying for
• Advice on the tax treatment, including the £30,000 exemption and what falls outside it
• Confidentiality, non-derogatory statements and an agreed reference
• Reaffirmation or replacement of restrictive covenants, which is often the real value
• A short note on how to open the conversation and keep it without prejudice or protected
• One round of amendments after the employee's adviser responds

What is not included

• Advising the employee, which their own adviser must do independently for the agreement to be valid
• Tribunal representation if the matter does not settle
• Payroll processing of the settlement sums
• Handling the settlement payment, since I do not hold client money

Questions I am often asked

Can we offer a settlement without starting a performance process?

Under a protected conversation, yes, for ordinary unfair dismissal purposes. The offer is stronger and safer after enough process to show the shortfall, and where discrimination could be alleged the protection does not apply. The note helps judge the timing.

What should we pay to settle a performance exit?

Notice, accrued holiday and a compensation payment reflecting the process avoided and the claim risk, often a few months' salary. The compensation uses the thirty thousand pound exemption; notice is taxed as earnings.

The employee has just raised a grievance. Can we still offer an exit?

With care. An exit offered in response to a grievance looks like victimisation, the protected conversation may not cover the claims, and the grievance should be dealt with. The note explains how to approach it.

Related guidance and services

• Settlement agreements for employers, £795, the service this page describes
• Employment contracts and handbooks, £595
• Shareholders agreement, £995
• Settlement agreement after a grievance
• Employment contract with a probation period

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.