Introduction to this document

Letter to accompany settlement agreement

Once you have negotiated a settlement with the employee in principle, you will need to draft an agreement and give it to them with a covering letter explaining the requirement that they seek independent legal advice in connection with its content.

The negotiation process

When you produce a draft Settlement Agreement for an employee to approve after having had either a “without prejudice” meeting or a meeting under s.111A of the Employment Rights Act 1996 with them, you should give it with an appropriate covering letter. For the “without prejudice” rule to apply there must be an existing employment dispute between the parties and the discussions must be a genuine attempt to settle that dispute. In this scenario, use our letter, which must be clearly marked “without prejudice”, as should all further correspondence, so as to avoid disclosure of the content of it should negotiations for settlement break down prior to signature of the agreement. 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 an existing employment dispute between the parties. 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 process, is not without significant risk. If you do decide to do this, you can still use our letter but use the optional sentences that refer to s.111A and delete the references to “without prejudice” and to resolution of the dispute.

It is usually you (as the employer), or your solicitors, who will produce the draft settlement agreement. However, there is no point in going to the time and expense of having an agreement drafted if you have not at least reached a settlement agreement in principle with your employee as part of your negotiations. As the covering letter makes clear, the employee will then be required to take independent legal advice on the draft agreement - and it spells out the categories of people from whom the employee can take such independent advice so as to comply with the statutory requirements. Thereafter, this will usually result in a period of negotiation with the employee’s legal advisor until you agree on the terms of the draft agreement.

Acas Code of Practice on Settlement Agreements

Where a settlement is reached specifically under s.111A (i.e. not settlement agreements reached following “without prejudice” discussions), there’s a statutory Acas Code of Practice that should be followed. The Code provides guidance on what constitutes improper behaviour by the employer and states that the parties should be given a reasonable period of time to consider the proposed settlement agreement and, generally, a minimum of ten calendar days should be allowed, unless agreed otherwise.  It also states that, whilst not a legal requirement, employers should allow employees to be accompanied at the discussion meeting by a work colleague or trade union official/representative. Therefore, our letter refers to these provisions when the pre-termination discussions have taken place under s.111A.

Subject to contract

Once the settlement agreement has been agreed, two copies are produced for signature. When signed by both parties, the agreement becomes legally binding and each party keeps one copy. You should make it clear that, until the settlement agreement is signed by all parties, no part of it is contractually binding, so ensure that you mark it “subject to contract” until the final, agreed version is ready for signature. It’s not unknown for new information to come to light during the conduct of negotiations with the result that you no longer wish to go ahead with the favourable settlement terms that you originally proposed!