Like all employers, you'll have to dismiss employees from time to time.  It's not pleasant, and there are different ways to do it. 
Some employers follow no process and risk an employment tribunal claim, whilst some go through lengthy procedures to achieve a fair dismissal. Others do a tactical and practical hybrid option to achieve the result they want quickly while protecting their current and future position. In this guide, we've set out the way to settle claims quickly and effectively.

Tim Lang

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What are settlement agreements?

Until a few years ago they were known as compromise agreements.  As the name suggests, they settle claims that an employee has, or may have, against their employer. Ideally they can terminate employment on terms that both parties are content with. 

From an employer’s perspective, they involve paying an acceptable sum whilst gaining the certainty of no adverse repercussions from the dismissal. They can also be more effective than launching into a time-consuming performance management or disciplinary process.  For an employee, they will usually receive a reasonable pay-off. 

Settlement agreements can also be used to settle claims during employment. This provides certainty for the employer that an employee cannot bring claims but can remain in the business. But this rarely works in practice because, by the time things get that far, the working relationship has probably broken down.

Claims that can be settled include:

-    breach of contract (e.g. you did not pay them enough salary or notice pay)
-    most statutory claims, including unfair dismissal and discrimination
-    personal injury claims (although normally not claims for future personal injury)
-    certain pensions claims (but not in respect of some accrued pension rights)

Some claims, mainly contractual ones, can simply be agreed with the employee that they will waive the claim in return for a payment.  But for statutory claims – which are the ones employers are normally most concerned about – it is necessary to use either an Acas settlement or a legally compliant settlement agreement.

Rules around settlement agreements

A settlement agreement:

1.    Must be in writing providing clarity and certainty.

2.    Must relate to a particular complaint or particular proceedings and be specific about the issues being settled.

3.    The employee must have received legal advice from arelevant independent adviser (identified in the agreement) on the terms and effect of the agreement, and how it would affect their ability to pursue rights in an employment tribunal. 

These advisers fall into four main categories: (a) qualified lawyers, (b) trade union officers, officials, members or employees who have been certified as competent to advise and are authorised by their union to give this advice, (c) advice centre workers who are certified as competent and authorised, (d) certain others, including some legal executives. Qualified HR professionals do not count, unless they happen to fall into the other categories. 

The adviser must not be employed by, acting for or connected with the employer.  

4.    The independent adviser must be insured against the risk of a claim stemming from the advice. 

5.    The agreement must confirm that the conditions regulating settlement agreements have been complied with.

Things to think about before approaching the employee

Broaching the subject of a settlement agreement needs to be carefully handled. Usually the employer is asking the employee to leave their job and waive rights to certain claims against them. 

Is a settlement agreement the best route?

•    Ensure a settlement agreement is commercially the best option.
•    Ensure a settlement agreement is wise in the circumstances, bearing in mind the employee must seek independent legal advice and could be advised of claims they would otherwise not have known about.
•    Ensure other ways of resolving the issue have been carefully considered, for example utilising a capability, performance management or disciplinary process.
•    Consider the level of risk any potential claims pose.

Timing

•    Consider the employee’s state of mind, and how quickly the employer wishes to resolve the situation
•    Some employees may welcome a settlement agreement. They can provide a clean break on mutually acceptable terms and allow parting on good terms, supported by a reference.
•    If the suggestion of a settlement agreement comes out of the blue, the employee may become disgruntled, so employers should not underestimate the impact of the conversation.

Without prejudice and protected conversations

Without prejudice allows certain conversations to be off the record, and they cannot be referred to in a court or tribunal. They allow parties to have free and open discussions and to explore settlement without fear of increasing litigation risk. 

Not all 'without prejudice' conversations are actually without prejudice. Compliance with legally recognised characteristics is necessary. 

•    There must be a genuine attempt to settle an 'existing dispute' – we explain what that means below.
•    Where there has been fraud, undue influence of some other “unambiguous impropriety” like blackmail or perjury, the protection of without prejudice is lost. 
•    The court or tribunal may look at without prejudice discussions where there is a dispute about what a settlement agreement means.
•    If there is not an existing dispute, 'without prejudice' will not apply. 

An existing dispute is:
•    A claim the employee has already issued in the employment tribunal. 
•    Where the employee might reasonably contemplate bringing a claim.
•    A grievance does not always amount to an existing dispute because they can be settled to an employee’s satisfaction. If not, then there could be a dispute. 
•    Thinking about litigation could also fulfil the 'existing dispute' requirement. 


If an employer wishes to dismiss an employee quickly without following a full process but there is no 'existing dispute' with them, section 111A of the Employment Rights Act allows some pre-termination conversations to be kept confidential. To satisfy the 'pre-termination' element, there must have been an offer made to the employee, and talk of termination on agreed terms.   These discussions are known as 'protected conversations'.

Protected conversations do not apply to every situation. It applies only where the employee goes on to bring an unfair dismissal claim. Where there is an automatically unfair reason for dismissal, e.g. asserting a statutory right, whistleblowing or trade union membership, you cannot keep discussions around termination confidential. Protected conversations won’t, in fact, be protected (but 'without prejudice' still might apply, if there’s an existing dispute) where the employee later claims:

-    breach of contract
-    wrongful dismissal
-    discrimination, harassment or victimisation (or other Equality Act behaviour)

Also, protected conversations will lose protection where there has been “improper behaviour”. Acas lists as examples:

•    Harassment, bullying and intimidation through offensive words and aggressive behaviour.
•    Physical assault (actual or threatened) and other criminal behaviour.
•    Victimisation.
•    Discrimination.
•    Putting undue pressure on a party. This includes telling an employee, before the disciplinary process has started, that if they don’t agree a settlement proposal, they’ll be dismissed. It also includes not giving the employee enough time to consider a proposed settlement.

Dealing with settlement negotiations 

A face-to-face meeting is usually best, as it sets a more approachable tone which is lost in writing. 

Allow the employee to be accompanied by a colleague or a trade union official. The employee doesn’t have a legal right to this, but it can be helpful. Allowing a companion can reduce the pressure the employee may feel. 

The Meeting

    The employer should be clear about the reason for the meeting, explaining their concerns about the employee’s conduct, performance, or whatever reason led to the discussion. Tell them the discussion is voluntary and will not be admissible at tribunal. Ideally the employee should consent to this and acknowledge you’re both trying to avoid litigation. 

Explain to the employee that you have in mind an exit with an agreed settlement package. Don’t present it as a fait accompli, and be careful not to threaten dismissal if they refuse to agree to terms.

    Allow the employee a reasonable time to consider the proposals and obtain legal advice.

Preparing the Settlement Agreement

    If the employee agrees to your proposal, the next step is to get a formal settlement agreement drawn up, which must comply with the legal requirements set out above. 

There are some core issues to think about when preparing the settlement agreement:-

(a)    The date the employee’s employment will terminate and confirmation that they will be paid salary up until that date and any expenses or loans and accrued but untaken holiday they are owed. 

(b)    What the employer will do in return for them agreeing the settlement. It’s often a payment, but it could be an agreed reference. Employers should ensure it’s distinct from the amounts you’re already liable to pay under the employment contract – salary, holiday etc. 

(c)    What will happen during the notice period? Will the employee be paid in lieu of notice (PILON)? Garden leave? 

(d)    Do you want to build some restrictive covenants, or confidentiality clauses, into the settlement agreement? 

(e)    Legal fees. It’s usual, but not compulsory, for the employer to contribute to the employee’s costs in getting advice on the agreement.   This is typically £350 - £500 (+VAT).
    
    We can help you prepare a suitable agreement to send to the employee.  

Here are some other things that should be in the agreement:-
•    A waiver of the employee’s claims. The employee needs to confirm in the agreement that they’re accepting the settlement in full and final satisfaction of those claims. 

•    An employee warranty that the claims you’ve listed in the agreement are the only ones the employee believes they have against you.

•    A clause entitling you to withhold money from the termination payment until the time limit has passed for the employee to bring any of the potential claims. You’d only have to pay the balance if no claims were brought. 

•    Confirmation that the employee will withdraw any tribunal proceedings that have already been issued. 

•    Terms and details about the return of company property. 

•    Details of how the employee’s shares and pension will be dealt with.

•    An employee warranty that they haven’t already got another job, as that might affect the compensation you have decided to pay them. 

•    An employee warranty that they haven’t committed a repudiatory breach of contract and that you’ve relied on that warranty. 

•    If the employee is a director or other company officer, they’ll probably need to resign from that position on termination.

•    A reference is not compulsory, but can be a useful sweetener. 

•    Confidentiality about the terms of the settlement. This is useful commercially and also to prevent precedents being formed. 

•    An agreed internal announcement. This avoids speculation and office gossip which can impact negatively on working environments. 

•    There should be a clause in the agreement saying that it represents the entire agreement and that no other terms outside this agreement have been reached. Specify that it’s governed by the law of England and Wales. 

•    Confirm the agreement is without prejudice and subject to contract. It becomes binding once signed and dated by both you and the employee.

Breach of the settlement agreement

Settlement agreements are designed to be enforceable.

What is the breach? How significant is it? Is it something that a stern letter to the ex-employee could sort out?  And don’t forget breaches work both ways: if you breach the agreement by not paying everything that’s due for example, the employee could sue you.
    
In serious cases – for example, where the employee has breached a restrictive covenant and you’ve been unable to resolve this between yourselves – the remedy is usually compensation or an injunction.  This is a specialist area with potential ramifications for the business, and you should seek legal advice at the earliest opportunity.