Termination by settlement agreement

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Conflict in the workplace can lead to a claim by an employee against you at an employment tribunal. Whether these types of claim have any merit or not, many employers decide to strike a deal with the unhappy employee that in return for the employee dropping the claim – or agreeing not to bring an anticipated claim – the employer will offer some form of beneficial arrangement, normally including a financial incentive.  

These agreements can be legitimate and efficient means to bring a dispute to a timely and cost effective close. There are two principal ways to strike these kinds of deal: (1) a standard ‘settlement agreement’ or (2) a ‘COT3 settlement’, brokered through Acas (Advisory, Conciliation and Arbitration Service but it generally refers to itself as ‘Acas’).

The Acas route has few formalities, but requires the involvement of Acas. The other route has several exacting requirements, but can be done before Acas has been involved. Our guidance here explains both types and will help you to identify which is appropriate for your particular circumstances.

This is an area where taking a legal view is highly advisable. It can be easy to slip up and find that something you have suggested as part of a legitimate settlement conversation is later used against you by the employee, if the settlement negotiations break down.

That’s where the important mechanisms of ‘without prejudice’ and ‘protected conversations’ come in. If used properly, they can help to protect your business interests and to ensure that you can smoothly transition the employee out of your business with minimum risk, cost and fuss. Using them properly is critically important. For they have limitations in their application and should only be relied upon for the right cases and at the right point in time.

Finally, when an employee leaves in these circumstances you must make sure you get the taxation correct – if you don’t deduct enough, HMRC is likely to go after you before it pursues the employee.

We recommend using our guides as your starting point and to set helpful context for the way in which the templates and other documents can be used. If you’re ever unsure about how to use any of our materials, just get in touch on the contact details below.


The content on elXtr has been prepared by LHS Solicitors. It’s intended as guidance only and not to be regarded as a substitute for consultation with one of our solicitors, since every case will ultimately turn on its own particular facts and circumstances. We recommend that you use our materials as your starting point and be aware that you sometimes have to follow a set procedure before taking any action, especially in an employment context. If you are in any doubt, we’d suggest that you get in touch with us and we’ll talk you through your options on how to get the right legal advice.