Settlement Agreement

Caragh Bailey
13/01/2021
127
17 min read
ACAS Settlement Agreement: COT3 from Employment Law Friend

A settlement agreement is a legally binding contract between you, the employee, and your employer. (Alternatively you may be a former employee, a worker or a potential employee). The agreement sets out the terms and conditions that you both agree to, to resolve a dispute which might otherwise have gone to employment tribunal. They are most often used to end an employment relationship in a way that suits both parties, when the relationship has broken down and would benefit from a clean break, or to save the hassle of a drawn out dispute. However, they can be used to resolve disputes without ending employment too. They used to be known as compromise agreements, and differ slightly from the Acas settlement agreement or COT3, as we'll explain later.

Key Features:
Source: Acas Guidance on Settlement Agreements

  • They are legally binding
  • They can waive an individual’s rights to bring a claim covered by the agreement – for example, the right to make a claim to an employment tribunal or court
  • The employee (or former employee) usually receives some form of financial payment and will also often receive a reference as part of the agreed terms
  • They are entirely voluntary – they include terms and conditions that are mutually agreed, and parties do not have to enter into them if they do not wish to do so
  • They are often reached through a process of discussion and negotiation. The parties do not have to accept the terms initially offered – there may be a process of negotiation during which both sides make offers and counter offers
  • Negotiations about settlement agreements are often confidential in the sense that, if an agreement is not reached, the negotiations may not be admissible as evidence in claims before an employment tribunal or in other court proceedings.

In order for the agreement to be a legally binding, you, the employee, must receive proper independent advice. Usually, your employer will pay for this, in full or in part. Our specialist employment solicitors are on hand to make sure you don't agree to the wrong deal.

Advantages
Disadvantages
  • Quick end to a problematic working relationship
  • Saves stress, upset and any embarrassment that may be caused by a drawn out dispute and/or investigation
  • Can save the time, money and stress on both sides that would be involved in fighting a tribunal claim
  • Can provide compensation for employees to help them transition to a different job
  • Can provide a good reference, which will not have to mention any disciplinary action that has been avoided by way of the settlement agreement
  • Your employer will have to pay out any agreed financial payment
  • Your employer risks damaging employee relations if they use settlements inappropriately (For example: as a way of encouraging retirement from their older employees)
  • There is a risk of damaging your working relationship further if a settlement cant be reached
  • Settlement negotiations are often inadmissible as evidence in any future tribunal claim (except for in certain circumstances, which we'll explain later) so you may lose your right to make a just claim to the employment tribunal

Who can propose a settlement agreement?

Both the Employer and the Employee could, but, in most cases, it is the employer.

Why would a company offer a settlement agreement?

An employer might, to save themselves and their employee the hassle of going through a drawn out performance management or disciplinary procedure.
For example: Kofi, a valued employee has begun a new role as part of necessary restructuring. Kofi has been unable to adjust to the new role despite support from management and several meetings to discuss potential adjustments. He feels demotivated and misses his old role, which no longer exists within the company. His employer may suggest a settlement agreement, whereby Kofi agrees to leave his job with a good reference and a financial payment in search of a position fulfilling his old role elsewhere.

Why would an employee suggest a settlement agreement?

If you are facing problems at work where you are not fault, but your workplace relationship(s) have broken down to the point of being unsalvageable, you may want to consider suggesting one.
For example: Lucia is struggling with a personality clash with her colleague Sarah. They are both good employees, but several attempts by their manager have failed to resolve the disruption this is causing to the rest of the team. Lucia approaches her manager to suggest a settlement agreement, whereby she agrees to leave her job with a good reference and a financial payment in search of a job within a better matched team.

Negotiating Settlement Agreements

There is no legal requirement for your employer to begin a disciplinary or performance management procedure before proposing a settlement. However, they should not propose a settlement instead of practising good management. Your employer has a duty of care for your wellbeing and should respect the sensitivity of the issues at hand.

It is recommended you, or your employer, begin discussions verbally first to introduce the issues at hand, and then make an offer in writing, for clarity. Whoever is proposing the settlement needs to be clear about the specific reasons for making the offer and be prepared to answer any questions from the other party. The negotiation process is voluntary and you can decline to proceed with negotiations at any time. You can refuse the offer and try to resolve the problem another way.

Negotiations often go through several rounds of meetings, offers and counter offers.
It is good practise to arrange meetings at times that are convenient to both sides, and to explain at the beginning of any meetings that they are expected to be inadmissible in any relevant legal proceedings (we'll explain this later).

A disciplinary procedure can take place before or during your negotiation, or; after, if no settlement can be reached. Any discussions about performance, attendance or conduct as part of settlement negotiations do not form part of the disciplinary process.

There are four main considerations that your employer should be sensitive to during negotiations:

    1
    The time you need
    Ideally, you will both agree to a timetable which allows both parties enough time to seek proper advice, without unnecessary delays.
    How long is reasonable will depend on your case and what both you and the other party consider to be reasonable. The ACAS Code of Practice on Settlement Agreements (under section 111A of the Employment Rights Act 1996) (see paragraphs 12 and 18 of the Code) requires a minimum of 10 days to consider the proposed terms and to seek advice, unless you both agree that less time is sufficient.
    In some cases, if your employer does not allow you a reasonable amount of time, this could mean that you would be able to refer to the otherwise confidential settlement negotiations in any subsequent unfair dismissal case at tribunal.

    2
    Accompaniment
    There is no legal requirement for your employer to allow you to bring a companion to your meetings. However, it is considered good practise that they do. This could be a colleague, a trade union official, or a trade union rep. If it is a work colleague, they should be given paid leave to attend the meeting(s). However, they are not legally protected from unfavourable treatment as a result of accompanying you, where a trade union official or representative would be protected.

    In certain cases, discrimination law requires that your employer does allow you to bring a companion. For example, where allowing you to be accompanied is a reasonable adjustment on account of your disability.

    Your companion should be allowed to be fully involved in the meeting, answering questions and expressing views on your behalf. During meetings, you may confer with your companion in private.

    If you and your employer agree to keep the settlement offer and negotiations confidential then everyone involved should respect the confidentiality of the meetings.

    3
    Payment
    The details of any payment as part of your settlement should be set out in your written offer. This might include what sum is in compensation for not pursuing a tribunal claim and if you are ending your employment: What sum covers any outstanding holiday entitlement you have accrued and what sum covers any pay in lieu of notice, if your agreement ends your employment without working your notice period. These payments may be treated differently for tax purposes. Your employer should include in your settlement offer what amount is to be deducted for PAYE tax and for NI as per each element of your total payment.

    4
    Ending Employment
    If you are leaving your position as a result of the settlement agreement: You and your employer may decide whether you will work your notice period, or to include pay in lieu of notice in your payment. As part of your negotiations, you may be able to conclude your employment by agreeing to 'leave on mutually agreed terms', or you may agree to being officially 'dismissed'.
    The agreement itself does not have to specify the reason that your employment has ended, but, be aware, the circumstances of and underlying reasons for the end of your employment may affect your entitlement to JSA, UC and some insurance pay outs. Check with your insurance provider and with Jobcentre Plus if these might apply to you.

The Written Document
For your settlement agreement to be legally binding, it must meet the following criteria:
  • It must be in the form of a written document.
  • It must relate to a specific complaint or proceedings (You may still be able to bring a claim to tribunal for any complaint or proceedings that are not listed in the written document).
  • You (the employee) must have received independent advice on the terms and effects of the agreement, and specifically, how it will affect your right to pursue the issue at tribunal or in court.
  • (Often, this will be paid for in part, or in full, by your employer. The cost of legal advice of this nature is usually in the range of £350-£550).
  • This independent advisor must be insured to cover the risks of you making a claim in respect of loss arising from the adice they have given you.
  • This advisor must be identified in the agreement.
  • The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied.

Who can be an independent advisor?
  • a qualified lawyer
  • a certified and authorised officer, official, employee or member of an independent trade union; or
  • a certified and authorised advice centre worker.

We recommend that you use a specialist employment law solicitor, who will be best able to review your case and to recommend your best path, as well as being well experienced in legal strategy, if you are forced to take the matter to tribunal.

We have a panel of experts whose prices for advice of this nature begin at £350. contact us for a review of your case.

How much could I get in a settlement agreement?

The settlement offer normally includes a payment and a reference, the payment will depend on the individual case. Here are some factors to consider when negotiating.

Payment
Reference
  • Contractual obligations
  • Notice period
  • Outstanding annual leave
  • Length of employment
  • Potential financial and time costs of resolving the problem if a settlement is not reached, including any potential tribunal claim
  • How long it will take you to find a comparable job
  • The issue itself
Your employer is not obligated to provide a reference but if they agree to, you'll both need to agree on:
  • Your reference must be a true and accurate summary
  • Your employer can only give information they believe to be correct
  • A full and comprehensive reference, or a shorter statement (this may be preferable in cases involving any misconduct or performance issues).
  • If your employer is asked for an informal oral reference, it must be consistent with the agreed written reference.

Is my settlement agreement confidential?

This is for you and your employer to decide upon in your negotiations. Often the agreement will include a clause where you agree to keep the agreement itself confidential. Sometimes they will include a clause which continues any confidentiality clauses that are already included in your contract of employment.

Any confidentiality clause that attempts to stop you from whistleblowing is legally unenforceable. If you need to report wrongdoing at work, in the public interest, you can, and the legal protections for whistleblowers still applies.

What if a settlement agreement can't be reached?

If no agreement can be reached nothing has to happen. But, it is likely that some other action is required to solve the problem that brought about the settlement offer in the first place. If your employer is at fault, you may continue by raising a grievance, or by making a claim to the employment tribunal. If you have been forced to resign due to your employer's misconduct you may have a case for constructive dismissal. Read our news articles to see what types of claims can go to tribunal, or contact us for a review of your case.

If the problem has arisen from your performance or conduct, it is likely that some disciplinary or performance management action will follow, if it has not begun already. If you are unable to make reasonable improvements in line with your contract of employment then it is likely that this will end in dismissal. However, if you believe that your dismissal was wrongful (The proper statutory or company procedures were not followed regarding your disciplinary, investigation, redundancy or dismissal) or unfair(the reason for your dismissal was unfair, or discriminatory), you may be able to fight it at employment tribunal.

Why can't I refer to the negotiations at tribunal?
There are two pieces of law which make the details of the settlement offers and negotiations inadmissible at a legal hearing (you can't use it as evidence). But either may be exempt in certain circumstances.

The ‘without prejudice’ principle
The without prejudice principle protects negotiations with a genuine aim to resolve an existing dispute. It is exempt, and you may refer to the negotiations in court, if there has been any unambiguous impropriety.

Existing Dispute: A disagreement or formal grievance is not enough alone. One of the parties (usually you, the employee) must have already brought legal proceedings; or, have reason to have contemplated doing so, even if you have not actually contemplated doing so yet.

Unambiguous Impropriety: Here are some examples. However, the court or tribunal will decide whether certain behaviour constitutes unambiguous impropriety based on the circumstances of each case.
Always
Sometimes
  • blackmail
  • physical violence
  • unlawful discrimination
  • threats
  • intimidation

The admissibility provisions on settlement agreements
Set out in section 111A of the Employment Rights Act 1996 (an amendment to the 1996 Act which was introduced in 2013).
This applies only to settlement offers and pre-termination negotiations in unfair dismissal and constructive dismissal claims , not including wrongful dismissal claims. 111A applies even when the without prejudice principle does not.
This provision means that you cannot refer to any part of your settlement negotiations as evidence to support your unfair or constructive dismissal claim at tribunal. However, if you are bringing another claim to tribunal, together with unfair or constructive dismissal, your settlement negotiations can be brought as evidence in proving the other claim(s).
These admissibility provisions are except in cases of automatically unfair dismissal and where there has been any improper behaviour.


Improper Behaviour: This includes behaviour that would also be unambiguous impropriety and more. Here are some examples:
  • harassment, bullying and intimidation
  • offensive words or aggressive behaviour
  • physical assault or the threat of physical assault
  • other criminal behaviour
  • victimisation
  • discrimination based on a protected characteristic
  • putting undue pressure on a party

Undue Pressure: For example, your employer might put undue pressure on you by telling you that if you refuse the settlement agreement, you will be dismissed. (They cannot make the decision to dismiss you before carrying out a thorough investigation as part of a disciplinary or performance management procedure). Alternatively, they might offer you a series of settlement offers, whereby the payment decreases after each day that you do not accept.
You might put undue pressure on your employer by threatening to ruin the company's public image if they do not agree to your terms (except for whistleblowing).

For more examples of when the admissibility provisions or without prejudice principle do not apply read the ACAS Code of Practice on Settlement Agreements here.

Frequently asked questions

This will depend on your case, your employer's integrity and the offer itself. You may get a better offer if you refuse the first, but you may lose the first offer altogether and find that the issue is settled in a less agreeable manner (such as dismissal and/or a stressful tribunal hearing). For your settlement offer to be legally binding, you must be given proper independent advice on whether to accept or not. Our panel of solicitors can help you choose the best path forward.

  • If you would be willing to accept a settlement offer, but the terms are disagreeable, it is best to speak to your employer calmly and ask how they came to the terms they have offered and how they calculated the payment. This will help you make a reasonable counter offer.
  • Seek proper independent advice before you accept or propose an offer. Usually your employer will pay for it and they should allow you to choose your own advisor, as long as the cost is reasonable.
  • You can refuse a settlement offer orally or in writing. It may be helpful to any future claim to explain your reasons for refusal in writing.

Redundancies are only to be used where there is no longer work available for the job/duties you were hired to do. Your employer might offer a voluntary redundancy (or severance) scheme, where volunteers are offered a settlement agreement, which may include redundancy pay. If the reason for leaving your employment by settlement agreement was redundancy, then you should be counted for the purpose of collective redundancy. You have special rights if you are one of 20 or more redundancies made in any 90 day period.
Check to see if you are eligible for statutory or contractual redundancy pay before accepting your settlement agreement. Your payment should reflect your redundancy entitlement as well as any other monetary considerations.

When ACAS resolve your dispute with a settlement agreement they record the terms in a COT3 form. Once the wording has been agreed verbally, the ACAS settlement agreement is binding, even if you never sign the paperwork. A COT3 agreement is only available during Acas conciliation or early conciliation
Settlement Agreement
COT3
More comprehensive
Short & Simple
Signed personally by both parties
Verbally binding, can be signed by representatives
Your independent advisor is concerned with your best interests.
ACAS must be neutral and cannot advice you regarding the terms of the COT3
Your independent advisor is usually paid for by your employer
If you want legal advice or representation, you are responsible for funding it yourself
Can be used at any time during or after your employment
Can only be used during a current dispute in which ACAS is conciliating

Because an ACAS COT3 agreement requires less time to prepare, and does not require independent advice, it is usually preferable if you seek a swift conclusion to any disputes which are solved at tribunal on the day of the hearing itself.

Need help negotiating your settlement agreement?
We can provide independent legal advice regarding your settlement negotiations. Get in contact with us and see how we can help.

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This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of our company. For employment law advice you can click here to organise a meeting with one of our panel of employment law solicitors.
 
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