How can I settle or waive employment claims?
There are only two ways to settle statutory employment claims. The first way is to use a qualifying Settlement agreement (previously called a compromise agreement). The other method involves a COT3 agreement, made with the involvement of ACAS (not covered in this note).
When do I use a settlement agreement?
You can use a settlement agreement whenever an employer and employee wish to resolve known potential statutory claims without litigation. It can be used after dismissing an employee or to achieve employee departure by mutual consent, whether or not the employee has started a formal legal claim.
If you need specific advice and want our expert lawyers to review your settlement agreement, Rocket Lawyer offers bespoke settlement agreement legal advice.
If employment is not ending in connection with the agreement then Ask a lawyer.
How can I get the employee to sign a settlement agreement?
The employer will normally make a payment in return for the employee’s waiver of claims, reflecting the likely value of those claims and the likelihood of their success.
Settlement agreements are normally concluded after negotiation between the parties. Since the employee must receive legal advice before signing the agreement, the employer will normally also instruct a lawyer or HR expert in connection with the overall settlement process so the parties are on an equal footing. Where an employee is seeking independent legal advice on a settlement agreement they can submit their details.
Be very careful when talking to employees about settlement agreements or departure, as you risk constructive dismissal.
All written communications about settlement agreements or agreed departure terms should be marked 'without prejudice and subject to contract' and oral discussions should be agreed by employer and employee to be 'without prejudice', which essentially means inadmissible in court. It’s best practice for communications that are to be without prejudice to be kept separate from those that aren’t. For example, a Dismissal letter should be made separately to a without prejudice communication about a settlement. If this is not possible, the 2 types of communication can be combined within one communication, but they should ideally be distinct within it and the employer should beware that this method is more prone to complications.
Never threaten to dismiss an employee if they don’t agree to leave. Raising the prospect of a departure 'out of the blue' (ie where there is no previous dispute, grievance, claim or formal disciplinary/performance procedure ongoing) or where the suggestion of departure might be said to be discrimination is particularly tricky. We recommend in this case that you Ask a lawyer.
What are the legal rules on settlement agreements?
It is essential that the settlement agreement records all the specific relevant claims or complaints that the employee is waiving. Settlement agreements often state that they waive every employment claim that exists at law but without specifics. This is unlikely to be valid.
Settlement agreements must also be in writing, can only be executed after the employee has received independent advice from a lawyer or other qualifying adviser, and must contain certain information.
Some claims just cannot be legally waived (eg failure to inform and consult under TUPE (Transfer of Undertakings (Protection of Employment)).
Remember that settlement agreements cannot be used to bypass standard procedures. For example, you cannot offer a settlement agreement to an employee on long-term sick leave without first considering reasonable adjustments (ie a period of long-term sickness is a strong indicator that an employee may be disabled). Proceeding directly with an offer to terminate a contract alongside a settlement agreement could provide evidence of an employer's failure to consider and make those adjustments.
Can settlement agreements settle future claims?
Settlement agreements should be used with extreme caution to settle claims that have not yet become known. For example, even if an agreement specifically states that sex discrimination claims are settled, a sex discrimination claim that arises later (ie the actions or discussions that give rise to the complaint have not occurred at the time the settlement agreement is made) will not be settled under the agreement and the employee may later pursue this claim. This type of ‘future claim’, described above, is different to situations where the cause of a claim is known (eg if the relevant discrimination has already occurred but the employee has not yet pursued any legal action) - such claims can be covered by a settlement agreement.
The law dictating whether future claims can be settled is not crystal clear. A 2022 Employment Appeal Tribunal (EAT) case suggested that future claims that have not yet become known cannot be settled using a settlement agreement. However, the EAT’s position has since been overturned by the more powerful Scottish Court of Session, where it was suggested that future claims that have not yet become known may be settled, so long as the type of claim is specifically identified and the agreement expresses an explicit intent to settle such future claims. A 2024 EAT case in England took a similar approach. However, it’s possible that either of these cases will be appealed (ie further changes to the law may occur) and that other sitting EATs may take various, nuanced views on whether future claims can be settled. As the issue is not yet definitively resolved, it’s best to be cautious when making a settlement agreement that covers future claims, and to avoid doing so if possible. Consider Asking a lawyer for advice before making such a settlement agreement.
What else should I think about?
Including an agreed form of reference in the agreement can avoid future disputes but you must not mislead the reference recipient.
Make sure that any agreements that need to stay in force are preserved as valid in the settlement agreement (for example, agreements governing share option rights, pensions or other benefits).
The rules on taxation of termination payments are tricky. Make sure that you deal with the payments correctly. See this HMRC page for further information. If in doubt about any of these issues, Ask a lawyer.
