Settlement Agreements: 5 Top Tips for an Employer

We answer five key questions to help employers avoid some common pitfalls in using settlement agreements.

Employers often see settlement agreements as an easy way to bring an employee’s contract to an end however there are some hidden complexities which employers should be aware of.

1. Will discussions about termination be protected under s.111A Employment Rights Act 1996?

It is important to understand the difference between the two ways in which initial settlement discussions can be ‘off the record’, in other words not admitted as evidence in the employment tribunal.

S.111A of the Employment Rights Act 1996 allows an employer to have pre-termination negotiations with an employee, where there is no existing dispute, with reduced risk that those conversations could be admissible in unfair dismissal proceedings. However, this provides limited protection for an employer. For example, there is no protection if the employee complains of potential automatic unfair dismissal, such as when an employee alleges they have been dismissed for asserting a statutory right, for reasons relating to pregnancy, whistle-blowing, health and safety or acting as an employee representative. It also does not apply to other claims such as discrimination.

‘Without prejudice’ privilege prevents statements made by parties in a genuine attempt to settle an existing dispute from being put before a court or tribunal as evidence. This means that, in order for an employer to have discussions which are protected by without prejudice privilege, there must already be a dispute. Unlike under s.111A, without prejudice privilege will protect negotiations relating to an employee’s allegation of discriminatory treatment or threatened litigation.

If there is no pre-existing dispute and the employee has not yet complained of discrimination or automatic unfair dismissal, then the employer may seek to have s.111A pre-termination negotiations. However, it is always safer to commence a formally recorded process and to provide evidence of an existing dispute as the employee may bring an automatic unfair dismissal or a discrimination claim further down the line. It is important to note that s.111A will not apply to protect communications even if allegations turn out to be unsubstantiated.

The other advantage of commencing a formal process before attempting ‘off the record’ discussions is that the employer can revert to their ‘on the record’ position if agreement is delayed or not reached.

2. Can we terminate employment through a settlement agreement rather than a carrying out a capability procedure?

There are risks in moving straight to an offer of a settlement agreement where there are performance concerns which have not been documented.

As mentioned above, if there is ‘on the record’ evidence of an existing dispute, for example the employer has identified performance concerns, it may be appropriate to have a without prejudice discussion with the employee. However, the employer should also be prepared to keep their options open by carrying on with the capability procedure and not present any foregone conclusions about the outcome of that process in case the without prejudice discussions are unsuccessful.

Use of a settlement agreement, to effect a negotiated exit, can help all involved avoid the time and attention which will be required to undertake and complete a capability procedure. Avoiding the need to formalise any capability concerns can help avoid embarrassment (on the part of the individual concerned, colleagues and the employer) and can help avoid the individual leaving with a negative reference.

However, care does need to be taken to ensure the employer can satisfy its legal obligation to ensure any reference provided is accurate and not misleading (see below). Employers should also be aware of any relevant regulatory obligations governing references, which might include a requirement to include conduct and capability concerns in a reference.

3. Does an employer have to provide a reference as part of a settlement agreement?

In general terms, there is no legal obligation for an employer to provide a reference for an employee. However, references may be required in certain regulated sectors or in accordance with certain workplace policies. If an employer does decide to prepare a reference, it should be marked confidential and for the addressee only.

There is no requirement to provide an agreed reference as part of a settlement agreement. However, if wording is agreed, a failure to provide the agreed reference could be in breach of contract.

In regulated sectors, settlement agreements should make clear that none of the agreed terms prevent the employer from fulfilling its safeguarding or other reporting obligations. The settlement agreement can include a provision that the employer can refuse to give the agreed reference if new circumstances arise which would have affected their original decision to provide a reference.

There are legal duties that an employer should be aware of when providing a reference. The reference should be accurate and not misleading, otherwise the employer could be liable to the recipient for negligent misstatement or the tort of deceit. It is possible to include a disclaimer in a reference to exclude liability to the recipient for negligence. However, any such disclaimer is likely to be void unless it would be fair and reasonable in all the circumstances to rely on it. A disclaimer would not usually apply to claims brought by the employee in relation to the reference.

Also, employers should note that a refusal to provide a reference can amount to unlawful victimisation, for example where the refusal is to ‘punish’ the ex-employee for some perceived wrongdoing relating to their employment, such as having raised a grievance.

4. When should an employer use a reaffirmation agreement?

A reaffirmation agreement is used to waive any claims that may arise from the date an employee signs a settlement agreement to the date their employment actually ends. To be valid, the re-affirmation will need to meet the same statutory requirements for settlement agreements.

Whether an employer should use a reaffirmation agreement depends on the length of time between signing the settlement agreement and the employment termination date. Often there is only a short gap and the risks of further claims arising are low. However, if there is a substantial gap between these dates, it may be sensible to require a reaffirmation letter. Factors to consider include whether the employee is in the workplace or on garden leave during the period, the nature of any issue(s) leading to the settlement and the likelihood of claims arising before termination.

5. Should an employer pay for an employee’s legal costs?

In order for a settlement agreement to be valid, the employee must have taken independent legal advice on the effect of the waiver of claims on their employment rights. There is no requirement for the employer to pay the employee’s legal costs but there is a clear expectation that the employer will make at least some contribution.

Settlement agreements commonly provide for an employer to contribute a capped amount to an employee’s costs for legal advice received in relation to the settlement agreement. This creates a contractual obligation on the employer and if the employer fails to meet their obligations, the employee can bring an action against them for breach of contract.

Contributions vary depending on the seniority of the employee and/or the complexity of the proposed terms or the issues leading to the agreement. Any invoices should be marked payable by the employer, but will be addressed to the employee.