What do settlement agreements do?
There is almost no employment claim that cannot in principle be settled by an agreement. Indeed, the vast bulk of all disputes, or potential disputes, are disposed of in a settlement agreement or an ACAS ‘COT3’ agreement.
These agreements involve the employee – and often they are an employee who has resigned or been dismissed – waiving the employment law claims that they have taken, or could take, to tribunal or court. They are therefore an indispensable tool for handling tribunal claims.
What are the differences between a COT3 and a settlement agreement?
There are several. Parties cannot conclude a COT3 without ACAS – the Arbitration and Conciliation Service, a government body set up to mediate workplace disputes – having been involved. One advantage is that this method is free of charge and, as soon as the ACAS officer declares consensus, the dispute is officially over – and that includes claims that have already gone to a tribunal.
A settlement agreement is the more common method and is the only method available when ACAS is not already involved. Settlement agreements are typically much more detailed than COT3s and so are used in more complex disputes and when both sides are legally represented.
Isn’t agreeing on a settlement an admission you’ve done something wrong?
No. First, settlements will nearly always state that liability is not admitted. Second, there may be many reasons why firms would want to conclude one. An employer will often settle on an economic basis – it can cost less to pay the employee (or ex-employee) than it would cost in legal fees to defend the claim. Also, there may be reasons why firms would not want a claim to be heard in a tribunal which is open to the public and the press – concern about reputation, perhaps, or confidential information.
What are the elements needed to conclude a valid settlement agreement?
One of the key things needed to make it legally valid is that the employee has to be represented by a solicitor. For that reason, employers invariably pay all or some of the employee’s legal costs. A typical sum would be £500 plus VAT but employees’ solicitors do ask for more if they have spent a lot of time on the matter.
The agreement also needs to state certain statutory information.
How much does it cost?
Settlement agreements will nearly always involve payment of an amount of money the employer is not legally obliged to pay, and this is called an ‘ex-gratia payment’. This contrasts with other payments that are often paid after
termination of contracts, like pay in lieu of notice and holiday pay, which are or can be legal obligations. How much of an ex-gratia to offer employees is one of the questions we get asked most and the answer is, unfortunately, ‘it depends’. Each case is different and how much money an employee is prepared to accept depends on many things. The employee might be badly advised and so have an inaccurate idea about the worth or merit of the claims they have brought or could bring. They might be desperate to settle so the employer has more leverage. They might have a very strong claim worth a lot in potential compensation. They might be highly paid. A claim, for example, for mainstream unfair dismissal, might be capped or it may be uncapped as with discrimination.
However, if it is clear that the employee has no strong claims and shows that they are willing to settle, an opening offer of one to three months’ pay is common. It is good when starting negotiations for firms to have an idea about the maximum they would be prepared to offer.
What if we can’t settle?
If the employee’s expectations are unrealistically high or there is an insurmountable stumbling block, negotiations can fail. Then litigation must take its course. Remember that an employee does not have to settle for money – they are always entitled to go to the tribunal, even if it is just to secure a declaration that the employer has acted unlawfully.
Remember that just because a claim can’t be settled at or before the start of litigation, that doesn’t mean it can never be settled – a settlement agreement can be concluded at any time, even ‘at the door of the tribunal’.
What can’t a settlement agreement do?
They can settle almost everything but there are limits. These include claims over pensions, certain collective consultation claims, some agency worker claims and some family-friendly benefits. And it used to be thought that these agreements couldn’t settle future unknown claims but, in a recent decision, Bathgate v Technip Singapore PTE Ltd [2023], a Scottish court decided that a settlement agreement could do so if it was plain and unequivocal.
How 3CS can help
For further information or help regarding settlement agreements or any employment law matter, please get in touch with your usual 3CS contact.
