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Using a settlement agreement to end an employment relationship can effectively provide a fresh start. To initiate this process, employers must conduct conversations confidentially. While there are ways to ensure these discussions remain private, employers should be mindful of certain limitations.

This guide explains what settlement agreements are, how to ensure conversations are ‘off the record’, and the benefits of both. It also includes cautionary advice, tips for strengthening your bargaining position, and an overview of non-disclosure agreements post-#MeToo.

What is a settlement agreement?

A settlement agreement is a binding agreement to waive most contractual and statutory employment rights against the employer, usually in exchange for a payment and sometimes other benefits such as an agreed reference.

To protect the employee, where there may be an imbalance of power, the agreement is only binding if certain conditions are met. Most significantly, unless the agreement is reached through Acas, the employee must receive advice from a lawyer or an appropriately qualified advisor.

Benefits of a settlement agreement

Dismissing an employee – and even negotiating an amical exit (such as for health reasons) – can be fraught with risk. Employers need to have a legally sound reason and must follow a fair dismissal process. If not, an employee with more than two years’ service could successfully bring a claim for unfair dismissal. Employees do not need two years’ service if they can establish that something else was at play, such as if the employer found the employee difficult because they ‘blew the whistle’.

Using a settlement agreement can avoid the cost, delay, hassle, and risk of instigating dismissal procedures. This allows the employer, with the employee’s agreement, to end the relationship. Unless certain rights are carved out, a suitably worded settlement agreement should prevent the employee from bringing claims against the employer. Even after the employee has left the organisation, if the employer is concerned the former employee may bring a tribunal claim, they can initiate discussions about entering a settlement agreement or this may be suggested by the individual or their representative.

Bargaining position

Sometimes the individual will accept the payment offered initially, or they or their advisor will negotiate for more. The negotiations will often be based on what each party believes the individual’s claim would be worth if no agreement was reached and they went to tribunal. Employers with a strong ‘open’ position tend to be in a stronger negotiating position than those who are trying to get out of a situation involving a clear breach of the employee’s rights. We can advise you on how to strengthen your business’s bargaining power.

Benefits of off-the-record discussions

Talking ‘off the record’ allows for a frank discussion without the risk of it being used in evidence before a court or employment tribunal.

Otherwise, if the employer asks the employee whether they would be interested in an agreed exit, the employee could resign and claim constructive unfair dismissal. Alternatively, if the employee is dismissed further down the line, the employee could use this conversation in an unfair dismissal claim to show that the performance management process was a sham and the employer ‘wanted them out’ all along.

When are conversations ‘off the record’?

If there is a dispute with the employee, the ‘without prejudice’ rule may apply to communications genuinely aimed at resolving the dispute through settlement. Such conversations cannot be shared with a tribunal if the negotiations fall through. This would apply to all types of employment claims, but does not apply in exceptional circumstances such as where the communications involve fraud or blackmail.

If there is no dispute with the employee, and provided certain conditions are met, an employer can have what are known as ‘protected conversations’ without the risk of the conversation coming back to haunt them. We can talk you through the timing and what you need to cover to make sure conversations are ‘off the record’.

A word of warning; this protection only applies to unfair dismissal claims and discussions before the employee has left. If the employee has other potential claims, such as for discrimination, the conversation could form evidence in a tribunal. This creates an element of uncertainty as the extent of potential claims may not be known. The protection also does not apply if the discussions involve ‘improper behaviour’. The Acas Code of practice on settlement agreements gives examples of improper behaviour.

Non-disclosure agreements

The #MeToo movement shone a light on the use of non-disclosure agreements (NDAs) to cover up harassment and discrimination by silencing victims. Settlement agreements usually include confidentiality clauses preventing both parties from discussing the agreement or its terms. Confidentiality clauses cannot, as a matter of law, prevent an individual from ‘whistleblowing’ or reporting anything to the police, and any wording suggesting this is void.

Various reports and consultations have taken place on NDAs since the #MeToo campaign. This has resulted in guidance on the use of NDAs from Acas and the Equality and Human Rights Commission, along with guidance to solicitors from their professional bodies. In the higher education sector, draft legislation will restrict the use of NDAs when the Higher Education (Freedom of Speech) Bill 2022-23 comes into force.

In 2019, the Government announced it would bring about changes to the law on NDAs, including allowing an individual to disclose the settlement agreement to their doctor or other regulated health professional. These changes are to take place when ‘parliamentary time allows’ but there are no signs of this at present.  Employers may wish to considering permitting such disclosures within the agreement however, particularly when the disputes has had an impact on the employee’s mental health.

How we can help

There are ways to efficiently bring an employment relationship to an end and to keep risks to a minimum, but there are traps for the unwary. Talk to one of our employment lawyers as soon as possible, and we can ensure you avoid these traps.

For further information, please contact one or our Employment experts.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.