Understanding the Basics of Settlement Agreements

If you want to end a contract of employment, but do not have the necessary legal grounds, it is still potentially possible to do so. You need to sit down with your employee and agree on an amount to be paid in exchange for their waiving or suspending their right to bring a claim for unfair dismissal. This is called a settlement agreement or compromise agreement. It is also possible to draw up this kind of agreement with an ex-employee who is threatening to sue.

You should consider making a settlement agreement in the following situations:

  • When the relationship between your employee and the business has broken down and the problem cannot be resolved any other way
  • You want to terminate an employee’s contract without running the risk of ending up in an employment tribunal

Below is a summary of the legal requirements that relate to settlement agreements. Once you have read this you should also refer to our step-by-step Your Responsibilities guide.

How you draw up the agreement is vital. Normal correspondence between the employee and employer that states that the termination payment is “in full and final settlement” is not sufficient. It will not be legally binding, so your employee could still bring a claim against you. To achieve a binding settlement you need to either:

  • Record the agreement on an Acos COT3 form and use ACAS as an arbitrator
  • Sign a properly witnessed agreement in which an employee agrees, in return for payment, to waive their right to make a claim against an employer following their termination of employment

For an agreement to be legally binding certain formalities are necessary

  • The agreement must be in writing not just in a digital or verbal format
  • It must detail the exact complaint the employee is agreeing to settle
  • The employee must have received proper independent legal advice prior to signing the agreement

In most cases, if you ask an employee to consider termination under a settlement agreement they are not allowed to use that fact against you. No details of the negotiations or resulting agreement can be used as evidence in any subsequent claim the employee may bring before an employment tribunal. However, this is not the case in the situations listed below. In these situations, details of settlement agreement negotiations can be revealed to others:

  • When either party has acted improperly during the agreement process. See our Improper Behaviour section to better understand what constitutes improper behaviour relating to settlement agreements
  • When an employee’s claim is related to an unfair dismissal case. See our Automatic Unfair Dismissal checklist for more details
  • Where the claim being brought relates to unlawful discrimination. Our Discrimination section explains more about this topic
  • Where the claim being made relates to a breach of contract

When negotiating this kind of settlement it is always a good idea to familiarise yourself with and follow the ACAS Code of Practice. You are not legally required to do this, but if you follow the code an employment tribunal will take this into account, so following the code can work in your favour.

If an employee breaches the provisions of a settlement agreement that leads to a quantifiable financial loss the employer may have grounds to sue that employee.

Our Rules and Regulations section contains more information relating to the legal requirements for settlement agreements.

To learn more about settlement agreements contact Hylton Potts for an appointment. We can be contacted via email or by calling 0207 381 8111.