The Advisory, Conciliation and Arbitration Service (ACAS) provides guidance and support on employment matters in the UK, and it plays a significant role in facilitating workplace dispute resolution. ACAS’s advice on settlement agreementsis aimed at helping both employers and employees understand what settlement agreements are, how they function, and the legal protections involved. Here’s a detailed look at what ACAS says about settlement agreements, including the key points they emphasize, the role ACAS plays in the process, and why following ACAS guidance is important.

1. What Is a Settlement Agreement According to ACAS?

According to ACAS, a settlement agreement is a legally binding document that allows an employer and an employee to resolve disputes or agree on employment termination terms without further legal action. In a settlement agreement, the employee agrees to waive specific rights to bring claims against the employer, often in exchange for financial compensation. These agreements offer a way to settle issues such as redundancies, disputes, or performance-related departures in a private and mutually agreeable manner.

ACAS highlights that, for a settlement agreement to be legally binding, it must meet certain conditions:

• It must be in writing.
• It must relate to a specific complaint or dispute.
• The employee must have received independent legal advice on the terms of the agreement and its impact.
• The legal advisor must be identified in the agreement and must hold appropriate insurance.
• The agreement must clearly state that it meets the statutory conditions for a settlement agreement.

2. ACAS’s Role in the Settlement Agreement Process

While ACAS does not draft or negotiate settlement agreements directly, it offers guidance and support to both parties to ensure the process is fair and clear. ACAS’s role in settlement agreements includes:

• Providing Information: ACAS offers accessible guidance on the purpose, structure, and key requirements of settlement agreements. This helps both employers and employees understand their rights and responsibilities.
• Encouraging Best Practices: ACAS emphasizes the importance of transparency, fairness, and clear communication when proposing a settlement agreement. They encourage both parties to engage in open dialogue and aim for mutually beneficial outcomes.
• Supporting Without Prejudice Conversations: ACAS explains that settlement agreements are often discussed during “without prejudice” or “protected conversations,” which allow both parties to discuss potential agreements confidentially, without the risk of statements being used in tribunal if negotiations break down.
• Advising on Independent Legal Advice: ACAS emphasizes that independent legal advice is essential for the agreement to be valid, ensuring that employees fully understand the implications of waiving their rights.

3. ACAS’s Guidance on the Contents of a Settlement Agreement

ACAS provides general guidelines on the common components of a settlement agreement, which may include:

• Financial Compensation: ACAS suggests that settlement agreements should specify any compensation offered, including details on tax treatment for different types of payments. While the first £30,000 of a termination payment may be tax-free, ACAS advises employers and employees to seek tax advice on payments.
• Waiver of Claims: The employee waives the right to bring specific legal claims against the employer. ACAS notes that this waiver is a central element of a settlement agreement but must be clearly outlined to avoid ambiguity.
• Confidentiality Clauses: ACAS explains that confidentiality clauses are common in settlement agreements to protect both the employer and the employee. However, they advise employers to be mindful of including overly restrictive confidentiality terms that could inhibit the employee from discussing the agreement with close family or seeking professional advice.
• Non-Disparagement Clauses: ACAS recommends that agreements may include clauses that prevent both parties from making negative comments about each other, helping protect reputations.
• Reference Agreements: ACAS notes that, where relevant, settlement agreements can include an agreed reference to help employees with future employment opportunities.

4. The Importance of “Protected Conversations” According to ACAS

ACAS places particular importance on protected conversations when discussing settlement agreements. These are conversations between an employer and an employee that allow them to discuss a potential settlement without fear that anything said will be used as evidence in a future tribunal claim. Protected conversations are legally protected under Section 111A of the Employment Rights Act 1996, allowing both parties to negotiate terms more freely.

ACAS advises that:

• Protected conversations should be conducted respectfully and without undue pressure.
• Employers should not use protected conversations to intimidate employees into accepting agreements, as this could lead to claims of unfair treatment or constructive dismissal.
• If a protected conversation is mishandled, it may lose its legal protection, allowing the content of the discussion to be used in tribunal claims.

Following ACAS’s guidance on protected conversations helps ensure that both parties can explore settlement options in good faith, minimizing the risk of disputes.

5. ACAS’s Recommendations on Independent Legal Advice

One of ACAS’s core messages is the importance of independent legal advice. For a settlement agreement to be legally valid, the employee must receive advice from a qualified legal advisor. ACAS underscores this requirement because it:

• Ensures that employees fully understand the agreement, including any rights they are waiving.
• Provides assurance that the employee has had an opportunity to review the agreement’s terms objectively.
• Offers a layer of protection to both parties, as a legally advised employee is less likely to challenge the agreement later on.

ACAS encourages employees to take their time in seeking legal advice and not feel pressured to sign an agreement without fully understanding its implications. Additionally, ACAS recommends that employers contribute to the cost of this advice as a gesture of good faith.

6. ACAS’s Advice on Fairness and Good Practice

ACAS encourages both employers and employees to follow best practices when negotiating settlement agreements:

• Voluntary Agreement: ACAS stresses that a settlement agreement should be voluntary and free from pressure. Employees should have the opportunity to consider their options and discuss alternatives.
• Reasonable Deadlines: ACAS advises employers to allow employees reasonable time (often at least 10 days) to review the agreement and seek legal advice.
• Mutual Respect: ACAS emphasizes that settlement discussions should be conducted respectfully, with sensitivity to the employee’s circumstances, particularly in cases involving redundancy, ill health, or disputes.

Following ACAS’s guidelines on fairness can help prevent claims of undue influence or coercion and ensures that the agreement holds up if scrutinized later.

7. Limitations of ACAS’s Role in Settlement Agreements

It’s essential to note that while ACAS provides guidance and support, it does not act as a legal representative for either party. ACAS will not:

• Draft the terms of a settlement agreement.
• Offer specific legal advice on the terms of the agreement.
• Enforce a settlement agreement if either party breaches its terms.

Employees and employers must rely on their legal advisors to draft, review, and enforce settlement agreements.

8. How Does ACAS Support COT3 Agreements?

In addition to settlement agreements, ACAS also facilitates COT3 agreements, which are a type of settlement specific to cases where an employee has filed a claim or intends to file a claim with the Employment Tribunal. ACAS Conciliation Officers assist both parties in reaching a COT3 agreement, which resolves the dispute without a formal tribunal hearing. Unlike settlement agreements, COT3 agreements do not require independent legal advice to be binding, but employees are encouraged to seek advice if needed.

Final Thoughts

ACAS’s guidance on settlement agreements underscores the importance of fairness, clarity, and legal compliance. By following ACAS recommendations, both employers and employees can navigate the settlement process with transparency, ensuring that the agreement is legally binding and fair to both parties. ACAS’s emphasis on independent legal advice, voluntary agreement, and fair treatment helps create a balanced approach to resolving employment disputes, offering an alternative to the uncertainties of tribunal claims.

For employees considering a settlement agreement, understanding ACAS’s guidance can help them make informed decisions and feel more confident about their rights and the fairness of the process. For employers, adhering to ACAS principles helps build trust, reduces the risk of disputes, and facilitates smoother, more respectful exits when employment relationships need to end.