Sometimes an employment relationship ends on its own. Other times, it needs a managed exit. That is where a settlement agreement comes in.
A settlement agreement is a legal contract between an employer and an employee. Usually, the employee agrees not to bring legal claims in exchange for a financial payment, an agreed reference, or other terms. These agreements are used to resolve disputes or potential disputes without going through a tribunal.
They are commonly used when continuing the employment relationship no longer makes sense. This could be due to redundancy, poor performance, a breakdown in trust, or where both sides agree it is time to move on. Sometimes formal procedures would only prolong the issue, increase the stress, or expose the business to greater risk.
Before an agreement is offered, employers usually open a dialogue informally. These discussions are often described as either protected conversations or without prejudice conversations. The terms are not interchangeable and misusing them carries real risk.
A protected conversation, under section 111A of the Employment Rights Act 1996, allows employers and employees to have off-the-record talks about ending employment, even if no dispute exists yet. The key benefit is that what’s said in these conversations usually cannot be used as evidence in ordinary unfair dismissal claims.
However, this protection is limited. If the employee brings claims involving discrimination, whistleblowing, breach of contract, or other automatically unfair dismissal reasons, then what was said in the protected conversation can be used as evidence. In other words, protected conversations do not shield employers from all legal risks, only from certain unfair dismissal claims.
Because of these limits, employers should be cautious about relying too heavily on protected conversations and understand that they are not a catch-all shield.
Without prejudice is a broader legal principle. It only applies where there is a genuine dispute and both parties are trying to resolve it. If those conditions are not met, the content of the conversation could be admissible in court or tribunal. You cannot label a conversation “without prejudice” and expect automatic protection.
If the legal protections do not apply, or the conversation is handled poorly, those discussions can end up in front of a judge or tribunal panel.
These agreements can be a sensible option when the employment relationship has broken down and formal processes would make the situation worse. But they are not a way to avoid dealing with issues properly. When used in the wrong context, such as pushing someone out without a fair process, it can lead to unfair dismissal claims or worse.
The employee must understand that the offer is entirely voluntary. If there is any sign of pressure, such as short deadlines, heavy-handed language, or presenting the agreement as their only option, the agreement could be challenged later. In serious cases, it could support a claim of duress or constructive dismissal.
If the employee is in a vulnerable position due to disability, mental health, pregnancy or any protected characteristic, extra care is needed. Power imbalances can be scrutinised later if the agreement is contested.
For a settlement agreement to be legally binding, the employee must receive independent legal advice. This is not optional. The employer usually covers the cost through a fixed contribution. The adviser must be appropriately qualified and sign a certificate confirming they have explained the effect of the agreement.
Do not rush the process. ACAS recommends giving at least ten calendar days for the employee to consider the offer and seek legal advice. Anything less can look coercive and risk undermining the agreement.
Even when the situation is tense, most employees want to feel they have been treated with basic dignity. If the process feels heavy-handed or dismissive, you are not just risking legal claims. You are also risking long-term reputational damage.
Handled properly, a settlement agreement offers closure and protection for both sides. Mishandled, it can spark legal claims, public backlash, or reputational damage.
If you are considering a settlement agreement, speak to us at HPC first. We will help you assess whether it is appropriate and make sure it is handled legally and professionally. We provide practical and commercial advice that keeps your business safe and your risks manageable.
To find out more information or to discuss settlement agreements please get in contact with our team of experts.
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