Settlement Agreements and protected conversations: What employers and employees need to know

When it becomes clear that an employment relationship is coming to an end, both employers and employees often want clarity, certainty and a away to avoid costly and stressful disputes.

One common route to achieve this is through a Settlement Agreement, often discussed as part of a protected or without prejudice conversation.

What is a Settlement Agreement?

A Settlement Agreement (previously known as a Compromise Agreement) is a legally binding contract between an employer and an employee, or another eligible category of worker. It sets out the terms on which the employment relationship will come to an end.

Once signed, the employee agrees not to bring legal claims against the employer in relation to their employment or its termination. In return, the employer will usually provide a termination or compensation payment, along with any agreed contractual or statutory payments, all of which are clearly set out in the agreement.

Settlement Agreements can be used in a wide range of situations, including:

• redundancy (whether compulsory or voluntary);
• disciplinary or conduct issues;
• performance management concerns;
• long-term sickness absence;
• workplace relationship or personality clashes;
• business transfers;
• resolving grievances.

While every agreement is tailored to the particular circumstances, Settlement Agreements typically deal with:

• the potential legal claims being settled;
• payments to be made and their tax treatment;
• confidentiality relating to the agreement and information relating to the respective parties;
• prohibition of negative/derogatory statements;
• an agreed reference.

Many agreements offer terms that go beyond an employee’s statutory minimum entitlements. In return, the employer gains certainty and finality, reducing the risk of future Employment Tribunal claims.

What if a Settlement Agreement is not signed?

An employee is under no obligation to accept or sign a Settlement Agreement. If they choose not to do so, they retain their full legal rights to pursue claims against the employer.

However, Employment Tribunal claims can be uncertain, time-consuming, and costly for both parties. Settlement Agreements often provide a straightforward and pragmatic way to bring matters to a close, allowing everyone to move on with clarity.

Protected Conversation

Protected Conversations, introduced in July 2013 and formally referred to as pre-termination negotiations, enable employers and employees to hold confidential, off-the-record discussions about the potential termination of employment.

Provided the conversation is conducted properly, anything said cannot usually be relied upon in subsequent open discussions or Tribunal proceedings.

Importantly:

• there does not need to be an existing dispute before starting a Protected Conversation;
• there does not have to be a disciplinary, performance, or grievance process already underway.

Protected Conversations are designed to allow honest discussions at an early stage without automatically escalating matters into formal procedures.

Limits of Protection

The protection afforded by Protected Conversations applies only to ordinary unfair dismissal claims. They do not protect employers against other types of claims, such as:

• Discrimination
• Automatic unfair dismissal
• Unlawful deduction of wages

If a conversation itself is discriminatory or is conducted improperly – for example by placing undue pressure on an employee, being overly aggressive, or presenting the proposal as a ‘done deal’, the protection may be lost.

Without Prejudice Conversations

Without Prejudice Conversations have a similar purpose to Protected Conversations but they take place where there is already a genuine dispute between the employer and employee.

This may include situations where:

• a contentious grievance has been raised;
• Employment Tribunal proceedings have commenced or are being actively contemplated.

Where a genuine dispute exists, Without Prejudice correspondence can provide broader protection than a Protected Conversation, including protection in relation to discrimination claims.

However, protection will be lost if the discussions involve improper conduct such as threats, dishonesty, fraud, blackmail, undue influence or serious abuse of privilege.

Planning a Protected or Without Prejudice Conversation (For Employers)

Before entering into a Protected or Without Prejudice Conversation, employers should carefully plan how matters will proceed if agreement cannot be reached.

In practice, this means considering whether there is a defensible ‘open’ process available, such as a capability or conduct procedure.

A Protected Conversation will often follow an initial open discussion with the employee addressing the underlying concerns, whether relating to performance, conduct or health.

If it becomes clear that matters are unlikely to be resolved through an open conversation, the employer may ask whether the employee is willing to explore alternative solutions, such as a mutually agreed exit. If the employee agrees, the employer should explain clearly that:

• the discussion is a confidential Protected Conversation under section 111A of the Employment Rights Act 1996;
• participation is entirely voluntary;
• the employee can withdraw from the discussion at any time.

Employers must not suggest that dismissal is inevitable if terms are not agreed, nor apply pressure to secure acceptance.

Where discussions progress, proposed terms may include an ex-gratia payment, notice pay, accrued holiday pay and an agreed reference. Any Settlement Agreement must allow adequate time for consideration and for the employee to obtain independent legal advice, with employers usually contributing towards that cost.