Settlement of employment claims: an employers’ guide

Working relationships are not easily managed and sometimes employees leave with a feeling of being wronged. When faced with a potential employment dispute, a settlement agreement can be a strategic way to resolve matters quickly, avoid legal costs, and protect your business.

The Government’s ‘Employment Rights Bill’ and plan to ‘Make Work Pay’ will bring a host of reforms to employment rights. Along with targeting zero hours contracts, fire and re-hire practices, and statutory sick pay eligibility, the Bill will remove the two-year qualifying period for unfair dismissal. The right to bring a claim for unfair dismissal from day-one means you will need to act with increasing sensitivity to underperformance or unhappy employees.

If you find yourself facing a possible employment claim you could consider offering a settlement agreement to nip the claim in the bud.

How does settlement happen?

Settlement agreements (also known as compromise agreements) are regularly offered to exiting employees following a redundancy or dismissal process. These contracts are made by mutual agreement and are legally binding and enforceable. The employee typically is offered financial compensation, and, in exchange, give up their right to bring any claims against their former employer.

Where an employee wants to bring an employment claim, ACAS will be their first point of contact. ACAS will typically advise mediation and settlement of a claim and will be able to assist the employee in preparing the agreement. If parties reach early conciliation, ACAS will ask parties to document the settlement using a COT3 agreement, but you should still take legal advice on negotiating the terms.

What if an employment claim is already proceeding to Tribunal?

If you are faced with an Employment Tribunal claim, following failed settlement negotiations, it can be easy to assume that your only option is to see the claim through to its conclusion at the Employment Tribunal. You might think that the option to settle is off the table. This is not the case, and parties can settle right up until the remedy hearing, even once the liability in the claim has been determined.

However, for some employers, the principle of not backing down and defending the claim outweighs the benefits of settlement. It’s your decision, but you should continue to bear settlement in mind at various stages of employment litigation as the broader financial burden of proceeding to tribunal can quickly add up.

In addition to your own legal costs in defending an Employment tribunal claim, an unsuccessful defence can lead to:

Financial loss

• You may be ordered to make a payment to compensate the employee for some financial loss if they have been unable to find new employment since termination. The onus is on the employee to provide evidence of efforts to mitigate their loss and seek new employment, but generally employees successfully provide evidence that they have sought new employment. This award may be capped at a reasonable amount of time if the employee has remained unemployed for a significant period of time.

Vento and injury to feelings

• This might not be something you had previously considered, but discrimination claims can give rise to an injury to feelings award. This compensates employees for any non-financial loss and is uncapped. Currently an award of up to £11,700 can be made for even the lowest level of claim.

Costs

• Although costs are not usually awarded in an Employment Tribunal, unless there has been serious or sustained misconduct on the part of the respondent, genuine attempts at settlement could help to mitigate any costs award. Without prejudice subject to costs settlement attempts can help to reduce any potential costs award if you proceed to tribunal and are unsuccessful. Calculating what a genuine and reasonable offer might be is often a tricky balance to strike and you will always benefit from an impartial opinion on settlement offers.

Bad publicity

• The Employment Tribunal will publish the verdict and may publish detailed written reasons for their decision. The press regularly picks up the online publication of stories of disgruntled former employees. Avoid the headlines and seek settlement.

Demoralised staff

• Whilst your focus is naturally on dealing with the claim, don’t underestimate the impact on your staff members. For the staff who remain in touch with their former colleague, this can be an awkward situation to navigate and impact on their job performance. Additionally, an employer who is unrelenting in their defence of a claim can create tension or unease for employees wishing to voice their own concerns.

Unfavourable enforcement terms

• If the Employment Tribunal finds in favour of the employee and order that judgement be entered against you, you will only have two weeks to pay the judgement debt. In discrimination cases where a particularly high injury to feelings awards is made, this can cause serious damage to any business. The benefit of a settlement agreement is that the payment terms can be agreed between the parties and can be negotiated to be as lenient as possible. It also allows employers to protect confidentiality and reduce legal and reputational risks.

Key terms in a settlement agreement

A well-drafted settlement agreement should address several critical areas:

1. Financial compensation & tax considerations

• The settlement amount typically includes notice pay and an ex gratia payment based on employment length.
• HMRC investigations into termination payments are becoming more common. Employers are responsible for operating PAYE correctly.
• A tax indemnity clause is usually included to make the employee responsible for any tax liabilities.

2. Restrictive covenants

• Employers can reinforce or introduce non-compete, non-solicitation, non-dealing and confidentiality clauses. These prevent employees from joining a competitor, using confidential information, poaching staff or dealing with the company’s existing or potential clients.

3. Return of Company Property

• The agreements should ensure the return of company devices and permanent deletion of business data from personal devices.

4. Employee References

• Employers are not legally required to provide a reference.
• Settlement agreements often include an agreed reference to confirm the employee’s job title and duration of employment.
• Employers can reserve the right to amend the reference if new, relevant information emerges.

5. Reputation management

• Employers can include clauses preventing the employee from making derogatory or disparaging statements about the company or its staff.
• Employees may also be required to remove references to the employer from their social media profiles.

6. Share Options & Equity Considerations

• Employees or directors may be required to transfer shares upon termination.
• Option agreements should be reviewed carefully to determine whether unexercised options will lapse or require a separate sale agreement.

Other alternatives

Resolution and mediation

• Although some employees may want their day in court, often there are underlying reasons for their anger, and they simply seek the opportunity to voice their opinions and grievances to you. Approaching a mediator and seeking a settlement can help satisfy their personal objectives and can give both parties a better understanding of the matters in issue, should the case proceed to tribunal. Even if settlement is not possible, agreement on some issues can help narrow the list of issues and reduce the burden on the Employment Tribunal.

Conclusion

Although you might not want to pay-out to an employee that you consider rightly dismissed or underperforming, you should consider the long-term financial and broader impact of pursuing a claim through to tribunal.

If you need advice on settlement agreements or employment disputes, we provide practical, impartial legal guidance to protect your business interests. Contact us today to discuss your situation confidentially.