Introduction to this document

Settlement agreement

When you want to prevent an employee from issuing proceedings in relation to the infringement of their statutory employment rights on termination of their employment, consider going down the settlement agreement route. This is an alternative to going through time-consuming dismissal procedures. In addition, it can also be used to settle serious employee disputes, such as allegations of constructive dismissal or unlawful discrimination.

Negotiated terminations

Sometimes, it will become necessary to dismiss an employee in circumstances where you want to prevent them from issuing employment tribunal or other court proceedings against you in relation to infringement of their statutory (or contractual) employment rights. This may happen in relation to senior employees when there is an existing employment dispute but you do not propose to go through formal dismissal procedures because you want them out as soon as possible. In such circumstances, you should hold a “without prejudice” meeting to discuss the termination package in return for their signing a Settlement Agreement. This is essentially a formal, legally binding agreement made between an employer and employee (or ex-employee) in which the employee agrees not to pursue particular claims they believe they have in relation to their employment or its termination, in return for a financial settlement from the employer.

Legal formalities

In order for a settlement agreement to be legally binding, a number of important statutory conditions must be fulfilled as follows: - the agreement must be in writing - it must relate to the “particular proceedings” - the employee must have received independent legal advice from a relevant adviser as to the terms and effect of the agreement and, in particular, its effect on their ability to pursue their rights before an employment tribunal - there must be in force, when the adviser gives the legal advice, a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising as a result of the advice - the agreement must identify the relevant adviser - the agreement must state that the conditions regulating settlement agreements under the relevant Act(s) are satisfied. The people who are eligible as “relevant advisers” are: - qualified lawyers (solicitors holding a practising certificate or barristers in practice or employed to give legal advice) - officers, officials, employees or members of an independent trade union, provided that they have been certified in writing by the union as competent and authorised to give advice - employees or volunteer workers at advice centres giving free legal advice, provided that they have been certified in writing by the advice centre as competent and authorised to give advice - fellows of the Institute of Legal Executives employed by solicitors’ practices.

Without prejudice

The “without prejudice” meeting should only take place with the employee’s consent and they should be warned in advance that you wish to have a meeting of this nature. There should also be a pre-existing employment dispute with the employee and the discussion must be a genuine attempt to settle the dispute. As stated above, the employee is required by law to seek independent legal advice as to the terms and effects of a settlement agreement. You should ensure that all correspondence in connection with the negotiation of the agreement is marked “without prejudice” (including the draft agreement itself) so as to avoid disclosure of the content of it should negotiations for settlement break down prior to signature of the agreement. Marking correspondence in this way will prevent the use of the details of any negotiations and offers made in any subsequent legal proceedings. Bear in mind that if settlement negotiations do break down, you’re likely to be left with a disgruntled employee!

Section 111A of the Employment Rights Act 1996

S.111A provides that any offer made or discussions held by an employer with a view to terminating an employee’s employment on agreed terms is inadmissible as evidence in any subsequent ordinary unfair dismissal claim - and in this case there doesn’t need to be a pre-existing employment dispute between the parties as there does for the “without prejudice” principle to apply. In addition, the fact that pre-termination settlement negotiations have taken place is inadmissible under s.111A as well as their content (so this extends further than “without prejudice” privilege which can prevent disclosure of the details of any offers but allow reference to the fact of negotiations having taken place).

Unfortunately, there are three exceptions to this inadmissibility rule. Firstly, it doesn’t apply where the employee claims to have been dismissed for an automatically unfair reason. Secondly, if there was “improper behaviour” by the employer, the employment tribunal may then determine the extent to which it’s just to admit the evidence. Thirdly, the employer may reserve the right to refer to the settlement offer for the purposes of any tribunal determination on costs/expenses. In addition, it doesn’t prevent the evidence being admitted in other types of claims, such as those for discrimination or breach of contract. Few employers are likely to be in a position to discount the possibility of an automatic unfair dismissal, discrimination or other claim when conducting a settlement discussion with an employee and therefore, in practice, conducting “open” pre-termination discussions under s.111A, as an alternative to going through a lengthy dismissal procedure, is not without significant risk. However, if you do decide to do this, you can still use our settlement agreement but it will not be on a “without prejudice” basis and, if settlement negotiations break down, you will only be able to prevent evidence of the fact and content of the meeting and any correspondence being admissible in any ordinary unfair dismissal proceedings where there has been no improper behaviour on your part.


The employee’s particular complaints

A settlement agreement may be used to settle one or more employee complaints. In drafting it, you should make clear each of the specific complaints being settled and refer to the relevant statutory provisions because, as identified above, the settlement agreement must relate to the “particular proceedings”. Particulars of the complaints made by the employee and of the particular allegations made in them must be inserted into the settlement agreement in the form of a brief factual and legal description. A ‘blanket agreement’ simply signing away all of an employee’s employment rights, or one which lists every form of employment right known to the law, will probably not be a valid settlement agreement. It’s always better to get legal advice on drafting a settlement agreement because it is a complex legal document which has to be tailored to fit the circumstances of the particular case. Our settlement agreement is a good starting point for you but you will need to consider the clauses in detail to decide which are relevant. In addition, not all sums payable under a settlement agreement are tax-free so speak to your accountant if you’re unsure.