Settlement agreements: what an employer needs to get right

A settlement agreement is a contract in which an employee agrees not to bring, or to withdraw, claims against the employer in return for a payment or other terms. Apart from an agreement reached through ACAS conciliation, it is the only routine way to settle most statutory employment claims. The law protects employees from signing away their rights carelessly, so an agreement that misses one of the statutory conditions may not stop a claim at all, even after the money has been paid.

The conditions that make it binding

Under section 203 of the Employment Rights Act 1996, and matching provisions in other employment statutes, a settlement agreement must:

1. Be in writing.

2. Relate to particular complaints or proceedings. A general waiver of ‘all claims’ is not enough on its own, so the agreement should list the claims being settled.

3. Be signed after the employee has received advice from a relevant independent adviser on its terms and effect, in particular its effect on their ability to bring a claim before an employment tribunal. This is usually a solicitor, though some trade union officials and advice centre workers can qualify.

4. Identify that adviser.

5. Be based on advice from an adviser who holds insurance or professional indemnity cover against a claim arising from that advice.

6. State that the statutory conditions regulating settlement agreements have been satisfied.

Employers commonly contribute towards the employee’s legal fees for this advice. The adviser normally signs a certificate confirming the points above, and it is attached to the agreement.

The clauses most agreements contain

The payment: how much, when, and that it is conditional on the employee signing and returning the agreement. Tax: salary to the termination date, holiday pay and notice pay are taxed as earnings in the usual way, while some genuinely non-contractual compensation can include a tax-free element within limits set by HMRC. The rules on notice pay are detailed, so agree the treatment with your payroll adviser before agreeing figures.

Confidentiality: the terms, and often the circumstances, are kept private. A clause cannot stop a worker making a protected disclosure, and the law restricting confidentiality clauses in harassment and discrimination cases is changing, so check the current position before relying on one. An agreed reference: the wording is usually attached, and it must be true and fair. Warranties: the employee confirms, for example, that they know of no other claims and have returned company property. Many agreements also deal with garden leave, internal announcements and post-employment restrictions.

“An agreement that misses one of the statutory conditions may not stop a claim at all, even after the money has been paid.”

Protected conversations and their limits

Section 111A of the Employment Rights Act 1996 lets an employer propose ending employment on agreed terms without that offer being used as evidence in an ordinary unfair dismissal claim, even where there is no existing dispute. This is often called a protected conversation. It does not cover discrimination claims, whistleblowing or other automatically unfair dismissal claims, or breach of contract claims, where the conversation can be put in evidence. The protection is also lost if the employer behaves improperly, for example by putting undue pressure on the employee or saying they will be dismissed if they refuse. The ACAS Code of Practice on settlement agreements suggests allowing at least ten calendar days to consider a written offer.

Where a dispute already exists, the separate without prejudice rule may also protect discussions, and it can extend to discrimination claims. Amara and Hana advise employers on exits and settlement terms.