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Employment Law

Employment Settlement Agreements And The Potential Pitfalls

Learn when to settle a dispute, what a settlement agreement contains, how binding and confidential it is. Read this Coles Miller blog post...

Employment Settlement Agreements And The Potential Pitfalls

What Is An Employment Settlement Agreement?

An employment settlement agreement is a legally binding document that resolves a dispute between employee and employer. It usually involves:

  • a severance payment to the employee in return for them not pursuing one or more claims through an employment tribunal or other courts
  • a confidentiality clause – the employer stipulates that the employee must not discuss the circumstances of the termination of their employment.

Settlement agreements were originally called compromise agreements. They were renamed on 29 July 2013 following a change in the law.

What Is A COT3 Agreement?

A COT3 is a type of settlement agreement. It records the terms agreed at an employment tribunal. Or it records the potential claim if the dispute is settled before the aggrieved employee files an ET1 claim form. If an ET1 has already been issued then it would be withdrawn.

COT3 agreements reflect what has been agreed between employee and employer with help from the Advisory, Conciliation and Arbitration Service (Acas), an independent public body that receives government funding.

When Should An Employer Offer A Settlement Agreement?

Settlements can be used in situations whereby an employer wishes to terminate an employee’s contract of employment. By offering a higher payout to the employee – such as when redundancy monies are due – the employer can avoid the risk of any number of claims, including an unfair dismissal claim.

Offering a settlement is also a way to sidestep time-consuming disciplinary procedures. The offending employee’s contract is terminated and they are paid off. A quick, clean break.

Employers will often consider other factors when deciding whether or not to settle an employment claim:

  • How strong is the employee’s case? Are they justified in their grievance or complaint? Would the claim be difficult to defend?
  • Does the claim involve discrimination? There is no limit on the damages payable for discrimination so settling the case may be a way to limit the potential costs.
  • How negative would the publicity be if the employee’s complaint were to be heard in an employment tribunal – in open court – and reported by the media?
  • By failing to defend the claim, would the employer be seen by other aggrieved employees as a soft target who always settles?
  • Is the claim – though important to the employee – trivial in the great scheme of things as far as the employer is concerned? Does the employer have more important things to worry about? Is it better for the employer to settle and move on so they can focus on running their company.

For either side, it can sometimes be all too tempting to rush into a settlement:

  • the employee is tempted because the employer is offering what appears to be a generous payout to make any potential claims go away
  • the employer is tempted because the employee has a very strong case – and the circumstances may be embarrassing for the company, its directors or managers.

But always take legal advice before offering, agreeing or refusing to settle, no matter how the circumstances of the case may first appear. Employment law can be complex…there may be factors you haven’t considered.

How Long Does It Take To Reach An Agreement?

Settlement agreements are a much faster way of dealing with claims than going to a tribunal. On average, it now takes 12 months before a claim can be heard at an employment tribunal.

Employers who offer settlement agreements inevitably want to know quickly whether their offer will be accepted or refused. In general, there is no time limit – but the accepted practice recommended by Acas is to give the employee 10 days to consider the offer.

What Does A Settlement Agreement Contain?

An agreement will typically contain the following:

  • The date that the employment contract is terminated and the reason for the termination, although this is not mandatory. In the absence of any given reason, the position would be that the employee left by agreement.
  • A payment figure in return for the employee not pursuing a claim.
  • Specified claims – not just the employee’s specific claim(s) but also a list of dozens of other potential claims so they can’t take legal action on those grounds either.
  • Tax indemnity – the employer doesn’t want to pay the employee’s tax after their employment has been terminated. Usually, the first £30,000 of compensation is tax-free provided the individual payment is correctly identified – otherwise it would be for HM Revenue & Customs to decide. The law governing this is the Income Tax (Earnings and Pensions) Act 2003.
  • Employee obligations – garden leave, if required, and post-termination restrictions.
  • Legal advice – the employee must confirm they have received the necessary legal advice before agreeing to the terms of the settlement.
  • Confidentiality – the employee must promise not to discuss the agreement with anyone other than specified people. However, these gagging clauses do not give employers carte blanche: they must not impinge on the legal rights of whistle-blowers.

Are Settlement Agreements Always Legally Binding?

Yes, but only if the terms comply with employment law. This is dealt with by the solicitor signing the adviser’s certificate that is attached to the agreement.

Are Settlement Agreements Private And Confidential?

Yes, up to a point. Unlike employment tribunal proceedings, settlement agreements are not a matter of public record. But they can be disclosed to HM Revenue & Customs and any other parties as identified in the agreement, subject to the confidentiality provisions.

It’s also worth noting that a settlement agreement won’t always protect you from media interest. Journalists could still get the story by speaking with other employees – or with anyone who knows the employee, someone who knows the facts but didn’t sign the agreement.

Confidentiality is a solid line of defence but it’s not impregnable.

Further Reading

  • Menopause In The Workplace. Read more…
  • Are You Suffering Discrimination Due To Your Sexual Orientation Or Gender Reassignment? Read more…

Get Expert Legal Advice On Employment Law

It is vitally important to get specialist legal advice before making, accepting or refusing any offers in an employment dispute.

Contact Coles Miller employment law solicitor Hugh Reid for expert advice on settlement agreements, employment tribunals and other related legal matters. He is based at our Poole office.

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