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Managing Performance – Using a Settlement Agreement as an alternative to Performance Management

Employment Law

Managing poor performance has always been tricky as it demands a consistent approach to bring an employee’s performance up to scratch. Often employees argue that it is a management issue where not enough resources, training or guidance have been provided. Some employees go on sick leave as they are anxious and suffer from stress having been told they are not performing adequately.

I would advise that before offering a Settlement Agreement, you have a meeting to discuss your specific capability concerns, and that the employee in question is given a Performance Improvement Plan (PIP). This is so the employee is aware of the concerns and the improvement required and can make an informed decision as to whether to accept the sum offered in a Settlement Agreement.

This also means any issues raised in their defence by the employee can be investigated first to make sure it is not a management issue.

Settlement Agreements require an employee to seek independent legal advice and the worst scenario is offering a Settlement Agreement only to find out that the performance concerns cannot be substantiated.

A failure to investigate properly could also result in an employee threatening to issue a grievance if they believe the reason for the unfair performance review is due to some type of discrimination.

Any performance concerns should not be historic and it is important to encourage your line managers to have “difficult conversations” with the staff they manage as soon as there is an issue.

Examples of poor performance should be provided so that the employee can understand what the problem is and what is required of them.

The amount of compensation offered in the Settlement Agreement should be based on how long it might take for this employee to complete the performance management process with it likely to end in dismissal. Notice paid in lieu and any accrued holiday up to the date of intended termination will need to be added as well as any contractual bonus or other contractual rights.

The Acas Code states that 10 calendar days should be given for the employee to decide whether to accept the offer, including the terms. This requires them having a copy of the actual Settlement Agreement. No undue pressure should be placed on the employee but there is nothing wrong with starting the process during this time period.

I have shared two case studies as examples of what this process can look like. In the first case study, we worked with an employer where the employee was very resistant to being performance managed. She brought a grievance against her managers. When this was not upheld and she was given a PIP she went on sick leave. In this case, a restructure of the business was also being considered. This route involved a four week process to go through a fair redundancy process rather than a long drawn out Performance Improvement Plan which might take at least three months.

The second case study was where we acted for an employee who had been offered a Settlement Agreement “out of the blue”. In this case there appeared to be less favourable treatment due to her sex and race which the company had not explored and considered. This enabled us to negotiate a lot more compensation for our client than the organisation had originally offered in the Settlement Agreement. This is why it is important to substantiate the PIP issue first before offering a Settlement Agreement or you may end up having to pay a lot more compensation than you wanted to.

Settlement Agreements can save a lot of management time and enable employees to depart with dignity. But if they are offered prematurely or in a way which is not backed up by formal and fair processes they can be an expensive route to take.

For more information about Settlement Agreements and Performance Improvement Plans, contact our experienced Employment Law team on 01273 609911, or email

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