This checklist sets out the key issues employers should consider before entering into a settlement agreement with an employee, and how and when to use settlement agreements. 

Settlement Agreements used to be called Compromise Agreements. The Government renamed them in back in July 2013 in order to promote a practice of resolving issues within organisations rather than at Employment Tribunals. To the same end, also in 2013 the Government introduced Pre-Termination Negotiations, or “protected conversations” as they are also known. These are designed to give employers a safe route to broach the offer of a Settlement Agreement for an employee to leave without this leading to an unfair dismissal claim, by – importantly – following the ACAS Code of Practice on Settlement Agreements under section 111A of the Employment Rights Act 1996.

Read below for a quick but vital point on Pre-Termination Negotiations, and when you must use these to protect the business.

What is a settlement agreement?

A settlement agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return the employer will agree to pay financial compensation. Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter.

In what circumstances will a settlement agreement be appropriate?

An employee can make a claim against a business under both their contract of employment and under statute. These claims may arise:

• on recruitment;
• during employment; or
• when their employment has been terminated.

In many cases, a business may want to make a payment to an employee in return for the employee waiving their rights to bring a claim against it. Businesses can enter into an agreement with an employee to settle potential claims whilst the employee is still working for the business, but in some situations, their employment will have ended (or will be about to end). The Settlement Agreement is needed to waive the employees contractual and statutory claims.

There are a number of circumstances when an employer may wish to think about using a settlement agreement, for example: at the start of investigation; in disciplinary or capability processes; or where an enhanced redundancy package is being offered. An enhanced redundancy package is one which offers more than the employee is entitled under their employment contract or statute.

What are the legal requirements for a valid settlement agreement?

For a settlement agreement to be legally binding, there are a number of conditions that must be met:

• The agreement must be in writing.
• The agreement must relate to a particular complaint/s or particular proceedings. For example, it would not be possible to cover ‘all possible employment law claims’ in a settlement agreement. There should be reference to the actual issues that have arisen, such as a redundancy or a grievance, and then any other possible claims should be particularised to the extend of referring to specific sections of the specific Acts or Regulations.
• The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on:
  • the terms and effect of the proposed agreement; and
  • its effect on their ability to pursue any rights before an employment tribunal.
• The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice.
• The employee’s adviser must be identified.
•  The agreement must state that the conditions regulating settlement agreements have been satisfied.

Why does the employee need to see a Solicitor when negotiating a settlement agreement?

The employee is giving up legal rights in the Settlement Agreement, and so must be properly advised by an independent solicitor for any agreement to be legally binding. Independent legal advice for an employee when dealing with a settlement agreement is vital for employers to ensure that such agreements are binding. It would prove a waste of time and effort for an employer to negotiate an agreement with an employee only to find it was not legally watertight as a consequence of a lack of independent legal advice to the employee. The requirement therefore provides protection for both employees and employers in this process. It is usual for the employer to pay a contribution to the cost of the legal advice that the employee obtains. Currently this is amount is £500 + VAT but there is no figure fixed by law and it may vary depending on the circumstances.

Possible content of a settlement agreement

Other than the legal requirements listed above, the contents of a settlement agreement are largely at the discretion of the business and the employee involved. Examples of common clauses include:

• Compensation for loss of employment.
• Contribution to legal fees.
• Waiver of claims by the employee, including warranty that the claims listed are the only claims which the employee has against the employer.
• Re-assertion or modification of existing restrictive covenants.
• Indemnity from employee in relation to tax and National Insurance Contributions.

Confidential information

Protecting confidential information is usually crucial to a business and therefore settlement agreements often contain confidentiality provisions, for example, the employee agrees:

• Not to use any confidential information.
• Not to disclose any confidential information to any person, company or other organisation.
• To keep the terms and existence of the agreement confidential.
• To not make any derogatory comments about the employer (or any individuals employed by it) to a third party.

It is important however to appreciate that a settlement agreement should not prevent an employee from making a protected disclosure. In the light of the #metoo movement changes were also made to clauses around non-disclosure that solicitors were allowed to draft or permit to be in agreements that they advised on.

Which types of claim cannot be settled by a settlement agreement?

A large number of statutory claims can be settled by a settlement agreement, but there are some which should not be, namely:

• Personal injury claims (unless the individual was aware, or could reasonably be aware, of the claim at the time the agreement was signed
• Pension claims.
• Claims following the transfer of a business.

Pre-Termination Negotiations aka “protected conversations”

Where there is no dispute and an employer is looking to discuss with an employee the possibility of the employee leaving the Company, then the normal “without prejudice” badging can’t be used. Why? because there is no dispute at this point. (Without Prejudice is shorthand for saying “whilst I’m trying to reach a settlement with you, none of what I say can be used in a claim or an Employment Tribunal).
Instead you must use the phrase “pre-termination negotiations under Section 111A of the ERA 1996” in all settlement communications in order to protect the business.

As the ACAS code of practice on settlement agreements, emphasises, by using section 111A, the pre-termination discussions between an employee and employer are treated as confidential.

This is particularly pertinent given a 2022 case of Mrs S Garrod v Riverstone Management Ltd where the Employment Appeal Tribunal (EAT) dismissed Mrs Garrod’s appeal to allow references to the contents of a discussion between her and her employer which was labelled as “without prejudice” in her discrimination and harassment claim. This case went all the way to an EAT because the company hadn’t protected itself by using Section 111A in discussions. Take note.

If you need further advice on managing Settlement Agreements and Pre-Termination Negotiations or please get in touch, our details are below.