Solicitor Helen Frankland explains the benefits and legalities of using them to terminate an employment relationship

Settlement agreements, formerly known as compromise agreements, came into effect on 29 July 2013. They are legally binding contracts that can be used to end an employment relationship on agreed terms. They prohibit an employee from bringing legal action against their employer on matters specifically covered in the agreement. Such agreements are voluntary as parties are under no obligation to agree them or enter into discussions about them.

Settlement agreements offer a clean break between an employee and employer, particularly when the employment relationship is not working. It is a win-win situation for both parties as the employee will have the security of a termination document setting out what financial settlement they are receiving, and the employer has the guarantee that they will not have to deal with a future claim from that employee.

For a settlement agreement to be legally binding, numerous conditions must be satisfied:

  • The agreement must be in writing.

  • The agreement must relate to a particular complaint or proceedings.

  • The employee must have received independent advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal.

  • The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice.

  • The agreement must identify the adviser.

  • The agreement must state that the applicable statutory conditions regulating the settlement agreement have been satisfied.

Historically, employers would only initiate settlement agreement discussions when the without prejudice rule applied. This rule prevents statements made in a genuine attempt to settle a dispute from being put before the court or tribunal as evidence.

Section 111A of the Employment Rights Act 1996, introduced in 2013, now allows more scope for settlement agreement discussions, as it allows agreements to be introduced and discussed on a confidential basis whether or not there is a current employment dispute between the parties. If relevant formalities are met, the application of section 111A means that discussions regarding settlement agreements cannot be used as evidence. Exceptions to the application of section 111A include claims that relate to an automatically unfair reason for dismissal or to a discrimination complaint.

Section 111A will not apply where there has been improper behaviour’. The Acas statutory Code of Practice on settlement agreements states that what constitutes improper behaviour is determined by a tribunal on the facts and circumstances of each case. Examples of such behaviour include, but are not limited to:

  • All forms of harassment, bullying and intimidation, including through the use of offensive words or aggressive behaviour.

  • Physical assault or the threat of physical assault and other criminal behaviour.

  • All forms of victimisation.

  • Discrimination on the grounds of age, sex, race, disability, sexual orientation, religion or belief, transgender, pregnancy and maternity, and marriage or civil partnership.

  • Putting undue pressure on a party.

Where there is improper behaviour, anything said or done in pre-termination negotiations will only be inadmissible if the tribunal considers it just to exclude such evidence.

Helen Frankland is an associate solicitor in the employment and HR team at Slater Heelis