Negotiating employee exits - guide for employers

Whether dealing with voluntary resignations, redundancies, or performance-related departures, employers must navigate complex legal terrain while protecting commercial interests. In situations where there are underlying issues or concerns between employer and employee, following formal disciplinary or capability procedures may seem the 'correct' approach, negotiating employee exits often delivers better commercial outcomes for employers. The costs of retaining unhappy or underperforming employees frequently exceed the investment required for negotiated departures.

The true cost of pursuing formal processes extends far beyond obvious expenses, including management time and distraction, investigation costs, productivity impact, legal and tribunal risks and reputational damage.

Benefits of negotiated employee exits

Strategic exit negotiations offer compelling advantages:

• Speed and certainty - Negotiated exits can be concluded within weeks rather than months, providing immediate resolution

• Risk mitigation - Settlement agreements eliminate tribunal claims and provide comprehensive legal protection

• Relationship preservation - Professional departures maintain relationships that may benefit future business opportunities

• Team stability - Quick resolution allows teams to move forward without prolonged disruption

• Cost control - Negotiated packages, while seeming expensive initially, often cost less than extended formal processes

Contractual obligations and notice periods

Every employment relationship begins with contractual terms that will ultimately govern its conclusion. Key considerations include:

• Statutory vs contractual notice periods - Statutory minimums range from one week (one month to two years' service) to twelve weeks (twelve or more years' service), but contractual periods often exceed these, particularly for senior roles

• Pay in lieu of notice (PILON) clauses - These provide valuable flexibility, allowing immediate termination while maintaining contractual compliance

• Garden leave provisions - Enable employers to exclude employees from work during notice periods while maintaining contractual obligations

• Breach of contract risks - Terminating without proper notice can lead to wrongful dismissal claims and additional compensation liability

• Restrictive Covenants and Post-Employment Obligations - post-employment restrictive covenants require particular attention during exit negotiations. Exit discussions may allow reinforcement of existing restrictions or introduction of additional protections. - Departing employees may seek relaxation of restrictions in exchange for other concessions

Strategic approaches to exit negotiations

Successful exit management often begins well before formal discussions commence and tends to reflect a sense of reduced trust and confidence often felt by both employer and employee.

The initial approach sets the tone for entire exit negotiations. Employers should consider who conducts these discussions – typically HR professionals or senior managers with appropriate training and authority. Legal representation may be advisable for complex cases or where significant risks exist.

Communication should be clear, professional, and focused on mutual interests where possible. While employers must protect their position, overly aggressive approaches often escalate tensions and increase costs. Conversely, appearing weak or unprepared can encourage unrealistic demands.

Understanding the departing employee's priorities enables creative solutions. Career transition support, training allowances, or flexible departure timing may be more valuable to employees than additional monetary compensation, while being less costly for employers.

Use of settlement agreements for employee departures

Settlement agreements, where employees are offered enhanced packages in exchange for clean departures, are a very common way of achieving clean employee exits.

Settlement agreements are particularly valuable where legal risks exist, relationships have deteriorated, or commercial sensitivity requires confidential departures. They provide certainty for both parties while avoiding the costs, delays, and uncertainties of formal procedures or litigation.

The typical process involves:

• Initial discussions and risk assessment

• Drafting settlement proposals

• Employee obtaining independent legal advice

• Negotiating final terms and signing

References and reputational considerations

Reference arrangements often prove contentious in exit negotiations, with significant implications for both departing employees and employer reputation management.

Employers have no general legal obligation to provide references, but where they choose to do so, references must be accurate, fair, and not misleading. The duty of care extends to both the employee and prospective employers, creating potential liability for inadequate or misleading information.

Standard approaches include factual references confirming employment dates, roles, and salary, or more detailed assessments covering performance and conduct. The chosen approach should align with company policy while reflecting the specific circumstances of the departure.

Where relationships have been problematic, structured references focusing on factual information may be preferable to subjective assessments. Conversely, positive departures might warrant more fulsome references that assist career progression while reflecting well on the employer.

Special considerations for shareholder employees

Company articles of association typically include provisions triggered by employment termination:

• Transfer restrictions - Limitations on share transfers to third parties

• Pre-emption rights - Existing shareholders' rights to acquire shares before external sales

• Valuation mechanisms - Methods for determining share value on departure

• Leaver categorisation - Distinction between "good" and "bad" leavers with different treatment

Other key issues which may need to be negotiated include :-

• Valuation methodology - Book value, earnings multiples, or independent professional valuations

• Valuation timing - Departure date, financial year-end, or completion of sale process

• Payment arrangements - Immediate payment, deferred consideration, or conditional payments

• Tax implications - Capital gains treatment, employment income implications, and available reliefs

How we can help

Navigating employee exits requires careful balancing commercial objectives, and relationship management. Our employment law team provides comprehensive support throughout the exit process, ensuring optimal outcomes while minimising risk.

We work with clients to develop exit strategies that align with business objectives:

• Early case assessment - Evaluating legal risks, potential claims, and commercial implications

• Cost-benefit analysis - Comparing formal procedure costs against negotiated exit options

• Timeline planning - Coordinating exit timing with business needs and regulatory requirements

• Stakeholder impact assessment - Considering effects on clients, suppliers, and remaining employees

• Articles review and interpretation - Analysing leaver provisions and valuation mechanisms

• Co-ordinated exit planning - Aligning employment and share treatment for optimal outcomes

• Valuation guidance - Advising on methodologies and challenging inappropriate valuations

For expert guidance on employee exit negotiations, settlement agreements, or shareholder-employee departures, contact our employment law team. We combine deep legal expertise with commercial awareness to deliver practical solutions that protect your business interests while maintaining professional relationships.