Settlement Agreement — Acas (UK)

A Settlement Agreement — Acas in the United Kingdom is a legally binding written instrument.

The legal basis for settlement agreements in England and Wales is found in Section 203 of the Employment Rights Act 1996 (ERA 1996), which provides that statutory employment rights cannot generally be contracted out of by agreement — but creates an exception for settlement agreements that comply with the strict statutory requirements set out in the Act. Similar provisions exist in other employment statutes, including Section 288 of the Trade Union and Labour Relations (Consolidation) Act 1992, Section 49 of the National Minimum Wage Act 1998, and Section 144 of the Equality Act 2010.

The most important requirement for a valid settlement agreement is that the employee must have received independent legal advice from a relevant independent adviser — typically a solicitor — before signing. The purpose of this requirement is to confirm that the employee fully understands the rights they are giving up. The adviser must sign a certificate confirming that they have provided the required advice. Without a signed adviser's certificate, the agreement is void insofar as it purports to exclude statutory rights.

Settlement agreements are used in a wide range of employment situations in England and Wales, including: the termination of employment by reason of redundancy where the employer wishes to offer an enhanced package above the statutory minimum; the resolution of a grievance or disciplinary matter without proceeding to a formal hearing; the settlement of an existing Employment Tribunal claim; the agreed departure of a senior employee on a 'without prejudice' basis; and the management exit of an employee whose performance or conduct is not meeting expectations but where a formal process would be time-consuming or commercially sensitive.

The ACAS Code of Practice on Settlement Agreements and Section 111A of the ERA 1996 provide additional protection for pre-termination negotiations. Under s.111A, offers and discussions made with a view to terminating employment on agreed terms are inadmissible in any subsequent unfair dismissal proceedings, provided the employer has not acted improperly. This allows employers to have frank conversations about the possibility of a settlement without those conversations being used against them in Tribunal proceedings.

The legal framework governing the Settlement Agreement (UK) in United Kingdom draws on several key statutes and regulatory bodies. Under the Employment Rights Act 1996, the Employment Tribunal adjudicates workplace disputes. Section 94 of the Employment Rights Act 1996 provides the right not to be unfairly dismissed. The Advisory, Conciliation and Arbitration Service (ACAS) provides early conciliation under Section 18A of the Employment Tribunals Act 1996. The UK GDPR and Data Protection Act 2018 govern personal data handling. HM Revenue and Customs (HMRC) administers PAYE and National Insurance contributions under the Income Tax (Earnings and Pensions) Act 2003. Parties executing a Settlement Agreement (UK) in United Kingdom should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Employment Rights Act 1996 sets the foundational requirements.

A settlement agreement is needed whenever an employer and employee in England and Wales wish to resolve a potential or actual employment dispute, or to bring an employment relationship to an end on terms that are agreed between the parties and that are intended to be legally final and binding.

The most common circumstances in which a settlement agreement is used in England and Wales include: redundancy situations where the employer wishes to offer the employee an enhanced redundancy payment above the statutory minimum and to obtain a clean waiver of all potential claims arising from the redundancy; grievance or disciplinary situations where a formal process is ongoing but both parties would prefer to resolve the matter by agreement rather than proceeding to a formal hearing; the managed departure of an underperforming employee where a formal performance improvement plan has not achieved the desired results; the resolution of a discrimination or harassment complaint that the employer considers would be best resolved by agreement; and the departure of a senior executive or director whose employment is being terminated on negotiated commercial terms.

A settlement agreement should be used before any Employment Tribunal proceedings are issued, or during those proceedings at any stage up to the final hearing. Where Tribunal proceedings have been issued, the settlement may be recorded in a COT3 form (brokered by ACAS) or in a settlement agreement signed by the parties. Where the settlement involves Tribunal proceedings, the Tribunal must be notified so that the claim can be withdrawn or dismissed.

Before approaching an employee with a settlement proposal, the employer should take legal advice. The ACAS Code of Practice recommends that the employer provide the employee with a minimum of 10 calendar days to consider the offer and to seek independent legal advice before being required to respond. It is also good practice for the employer to make a contribution to the employee's legal costs, as the requirement to obtain independent legal advice is a statutory condition for the agreement to be valid — a contribution of between £500 and £1,000 plus VAT is typical for a straightforward case.

A valid settlement agreement under Section 203 of the Employment Rights Act 1996 must contain several key elements to be legally effective.

First, the parties to the agreement must be clearly identified. The agreement should state the full legal names of the employer (including the registered company name and company number if applicable) and the employee, the nature of the employment relationship, and the employee's job title and place of work.

Second, the agreement must set out the termination terms, including the termination date, the notice period being given (or payment in lieu thereof), and the last day of employment. Where the employee is working their notice period, the agreement should specify any conditions that apply during the notice period.

Third, the financial terms of the settlement must be clearly stated. These will typically include the settlement payment itself — split between the taxable element (e.g. pay in lieu of notice, accrued holiday pay, any contractual bonus) and the ex gratia element (which benefits from the £30,000 tax exemption under ITEPA 2003). The agreement should also specify when each element of the payment will be made.

Fourth, the agreement must contain a clear list of the statutory claims being waived. Each specific statutory right must be identified by name and, ideally, by reference to the relevant statute. A non-exhaustive list might include: unfair dismissal (ERA 1996 s.94), wrongful dismissal, statutory redundancy pay (ERA 1996 s.135), claims under the Working Time Regulations 1998, claims under the Equality Act 2010 (specifying each protected characteristic), unlawful deduction of wages (ERA 1996 Part II), and breach of contract claims.

Fifth, the agreement must contain the independent legal adviser's certificate confirming that the adviser has advised the employee as to the terms and effect of the agreement. The adviser's name, qualification, address, and the name of their professional indemnity insurer must be stated.

Sixth, confidentiality provisions, non-disparagement clauses, and any agreed reference wording should be included where applicable. The confidentiality clause must not prevent the employee from making protected disclosures or reporting criminal conduct to a law enforcement body.

Finally, the governing law and jurisdiction (England and Wales) should be specified, and the agreement should include a warranty by the employee that they have not already presented any claim to an Employment Tribunal in respect of the matters being settled.

Additional compliance elements for a Settlement Agreement (UK) used in United Kingdom include: Under the Employment Rights Act 1996, the Employment Tribunal adjudicates workplace disputes. Section 94 of the Employment Rights Act 1996 provides the right not to be unfairly dismissed. The Advisory, Conciliation and Arbitration Service (ACAS) provides early conciliation under Section 18A of the Employment Tribunals Act 1996. The UK GDPR and Data Protection Act 2018 govern personal data handling. HM Revenue and Customs (HMRC) administers PAYE and National Insurance contributions under the Income Tax (Earnings and Pensions) Act 2003. Forms-legal.com provides this template as a starting point for United Kingdom-compliant documentation.