Understanding Golden Handshakes: What Small Businesses Need to Know About Employee Exit Agreements

Letting an employee go is rarely easy - whether it’s due to business changes, redundancy, or because someone’s moving on. You want to handle the exit process smoothly, protect your business, and treat your team fairly along the way.

That’s where the concept of a golden handshake comes in. You might have heard this term in high-profile news stories, but what does it actually mean for startups and small businesses in the UK? Is it just for big corporates, or could it play a role in your workplace too?

In this guide, we’ll break down what a golden handshake is, how it works in practice, and the steps you need to take if you’re considering one as part of an employee exit agreement. We’ll also help you avoid common pitfalls and set your business up for a graceful exit process - whatever your size.

If you’re keen to understand the essentials, keep reading for everything small business owners need to know.

What Is a Golden Handshake?

A “golden handshake” is an agreement to provide a departing employee - usually a senior executive or director - with a significant sum of money or benefits when they leave the company, often as part of a redundancy, dismissal, or retirement arrangement.

Essentially, it’s a financial incentive (or exit package) offered on their way out the door. The goal is to make the transition smooth, mutually agreeable, and, in some cases, to secure important protections for the business (like non-disclosure or non-compete undertakings).

Key components of a golden handshake can include:

• A lump-sum payment (often called an “ex gratia” payment or enhanced redundancy)
• Early vesting of shares or options
• Continuation of certain benefits (like healthcare or a company car)
• Other perks tied to their exit

The arrangement is typically documented in a formal exit agreement or settlement agreement.

Why Do Businesses Offer Golden Handshakes?

You might wonder why a business would pay extra to an employee who’s leaving. For small businesses (not just big corporates), there are several reasons why a golden handshake makes good business sense:

• Risk management: A financial incentive can encourage the employee to sign a release, waiving any legal claims or disputes against the company (for example, unfair dismissal, discrimination, or breach of contract).
• Protecting business interests: Exit packages may include clauses to prevent the employee from sharing confidential information, poaching clients, or competing against you (these are especially important for founders, directors, or senior staff). Find out more about non-compete clauses.
• Maintaining goodwill: How you treat people when they leave matters to your workplace morale, your brand reputation, and even your ability to attract new talent in the future.
• Ensuring a clean break: A professionally drafted golden handshake agreement can provide clarity, close out obligations, and help you move on with confidence.

It’s important to note that golden handshakes are not a legal requirement, but many businesses use them strategically during redundancies or settlements, especially for key team members.

Golden Handshake vs. Redundancy Pay - What’s the Difference?

This is a common area of confusion for small business owners, as both involve payments at the end of employment. Here’s how they differ:

• Redundancy pay: Required by UK law in some circumstances (read our redundancy laws guide). It’s calculated based on length of service, age, and weekly pay, with statutory minimums and some contractual top-ups.
• Golden handshake: An additional (and usually discretionary) payment agreed between you and the employee - usually to secure extra protections, resolve disputes, or offer more generous terms.

In practice, a golden handshake may include redundancy pay and extra compensation, so it’s best to be clear on what’s legally required and what’s added as additional incentive.

When Might a Small Business Use a Golden Handshake?

Golden handshakes aren’t just for blue chip firms or CEOs cashing out with millions. In fact, businesses of all sizes sometimes offer them in situations like:

• Senior employee exiting: A director, manager, or specialist with influence or key knowledge leaves the company
• Restructuring or closing down: The business is changing direction, merging, or winding up, and wants to help a loyal team member make a smooth exit
• To resolve disputes: There are disagreements or grievances, and both parties want a mutually-agreed departure with no ongoing legal risks
• Retirement: Marking the end of a long career and recognising the individual’s contributions

A typical golden handshake for a small or medium-sized business might include a modest lump-sum payment plus an agreement on things like confidentiality and post-employment restrictions.

What Should a Golden Handshake Agreement Include?

If you want to offer a golden handshake, it’s vital to get the paperwork right. The agreement (often called a settlement agreement) should cover:

• Total exit payment: The amount, how it’s calculated, and any tax implications (some parts may be tax-free, others subject to PAYE/NICs)
• Redundancy and notice pay: Any statutory amounts, and how these interact with the handshake
• Benefits and shares: How company benefits, share options, pension, or bonuses are handled on exit (including accelerated vesting if relevant)
• Waiver of claims: The employee confirms they will not bring future claims, in exchange for the payment and terms agreed. This is legally binding.
• Confidentiality and non-disparagement: Clear obligations for both sides to keep the agreement and any sensitive info private
• Restrictive covenants: Any restrictions on competing, soliciting clients, or poaching staff. It’s important these are reasonable and not too broad.
• Return of company property: A checklist for handing back laptops, keys, documents, or devices
• Reference/agreed statements: Sometimes you’ll include a mutually acceptable job reference or message for clients and colleagues

Avoid drafting these agreements yourself - legal documents should be tailored to your business and the particular exit scenario to ensure they’re truly enforceable and protect your interests. See our full guide on lawful employee dismissal for more details on required steps and documents.

Are There Legal Requirements for Golden Handshakes?

While golden handshakes are discretionary, certain laws and fair procedures still apply:

• Employment Rights Act 1996: Sets out rules on notice, redundancy, and dismissal processes. Ignoring legal process can risk unfair dismissal claims, even if a handshake is offered.
• Taxation rules: The first £30,000 of genuine termination payments may be tax-free, but salary, holiday pay, and some other elements are taxable - learn more about ex gratia payments and tax.
• Settlement Agreements: To be legally binding, these must be in writing, relate to specific claims, and the employee must get independent legal advice before signing.
• Discrimination law: The Equality Act 2010 means you cannot treat someone less favourably due to protected characteristics, even when structuring exit packages.

In summary: while you have flexibility, you must ensure that the process is fair and legally compliant. If you’re unsure, chat to an employment law expert to ensure your agreement is watertight and won’t lead to problems down the line.

What Are the Risks of Offering a Golden Handshake?

Done well, a golden handshake can strengthen your business and make transitions easier. But, like all legal steps, there are potential risks to watch out for:

• Unintended precedence: If your first exit agreement is especially generous, others may expect the same and costs could spiral.
• Unclear wording: Vague or poorly drafted documents can leave you exposed to future disputes or claims - only professionally prepared agreements will stand up in court.
• Tax errors: Incorrectly handled payments may lead to unexpected tax bills for the business or employee, plus penalties from HMRC.
• Breach of confidentiality: If post-exit restrictions aren’t included or enforceable, sensitive info could leak or former employees might entice away your clients or staff.

If you’re weighing up a golden handshake, take expert advice early. Mistakes at this stage can undo all your hard work and harm your reputation, so it’s wise to get advice tailored to your circumstances. For guidance on responding to sensitive HR issues, see our disciplinary hearings manual and managing disability at work resources.

How to Put a Golden Handshake Agreement in Place

If you think a golden handshake is right for your business, here are the steps you’ll need to follow:

1. Start the conversation: When you know an employee is leaving (planned or unplanned), discuss exit terms as early as possible. Make sure any offers are “without prejudice” (off the record) until a formal agreement is drawn up.
2. Draft an agreement: Work with a lawyer to prepare a tailored settlement agreement covering payment, waivers of claim, restrictions, and confidentiality.
3. Employee obtains legal advice: For the agreement to be binding, your employee must receive independent legal advice (usually from a solicitor) who can explain their rights before signing.
4. Payment and clearance: Once signed, all payments should be processed quickly, and company property returned.
5. Communicate clearly: Decide on messaging for the wider team and (if needed) clients; stick to any agreed lines in the settlement.

Can You Use Golden Handshakes for All Employees?

Golden handshakes are usually reserved for senior or key staff - directors, managers, or long-serving employees who present more business risk or have significant contractual rights.

For most junior employees, sticking to statutory redundancy, notice pay, or standard exit processes is sufficient. Overusing generous exits for routine departures can create unnecessary costs and expectations.

Always check employment contracts and workplace policies to see what’s promised already before offering extra. If you’re not sure, review your staff contract terms or get a lawyer to help interpret your obligations.

Best Practices for Small Businesses Considering Golden Handshakes

If you’re weighing up whether to use a golden handshake in your small business, keep these tips in mind:

• Don’t rush: Consider whether the costs and benefits justify the arrangement. Is there a genuine business reason, or are there alternative ways to achieve your goal?
• Keep everything in writing: Verbal promises can cause confusion; always get terms in a professionally prepared legal document.
• Be consistent, but flexible: While each case should be considered on its merits, having an internal exit policy (even informally) helps manage expectations.
• Consult experts early: Employment law, taxation, and contractual rights can be complex - expert input saves time, money, and reputational harm.

Every business’s situation is unique, but a tailored legal solution puts you in control of the exit process and helps avoid unpleasant surprises.

Key Takeaways

• A golden handshake is a discretionary, often generous exit package for departing employees, mainly senior team members, to secure a smooth and legally protected transition.
• Golden handshakes are not the same as redundancy pay, but may be offered in addition to required statutory payments.
• Using a golden handshake can help businesses resolve disputes, protect their interests, and safeguard sensitive information - but only if carefully documented.
• Settlement agreements must be in writing and the departing employee needs independent legal advice for the agreement to be fully binding.
• Poorly handled golden handshakes can create legal and tax risks or set unwanted precedents for future exits.
• It’s essential to seek professional advice before offering or signing any golden handshake or exit agreement to ensure compliance and avoid disputes.

If you need help preparing or reviewing a golden handshake or employee settlement agreement, Sprintlaw’s experts are here to support you. Call us on 08081347754 or email team@sprintlaw.co.uk for a free, no-obligations chat about your business needs.