There are many reasons for negotiating an exit package with an employee – from the need to reduce staff numbers to a breakdown of the relationship between employer and employee. Here, we will be looking at employee exits resulting from the threat of an Employment Tribunal; focusing on the different routes employers can take – namely Settlement Agreements and Acas terms of settlement (known as “COT3s”) – and their relative advantages/disadvantages.
Firstly, what is a COT3 and how does it differ from a Settlement Agreement? A COT3 is an agreement which records the terms of settlement of an Employment Tribunal claim (or potential claim) which has been agreed between an employer and an employee with the assistance of a conciliation officer employed by Acas.
Settlement Agreements, formerly known as Compromise Agreements, are also a means of agreeing a settlement between an employer and an employee. Although they have a wider remit of usage, they effectively have the same primary function as COT3s – to make a binding agreement between both parties that prevents any future claims being brought. Settlement Agreements are particularly popular with employers due to their flexibility. Additionally, due to the legal requirement for employees to obtain independent legal advice prior to signing the Settlement Agreement (which is usually funded by the employer), these agreements are generally viewed as a fair and effective method of approaching employee exits and settlements.
Although such agreements have been around for some time, COT3s have become increasingly popular since the Acas Early Conciliation service came into play in April 2014 – requiring anyone thinking of making an Employment Tribunal claim to notify Acas first. Acas then tries to resolve the dispute through the free Early Conciliation service, which can also be accessed by employers. A recent report has shown that of the total cases that went to Early Conciliation in the year 2015 – 2016, just over half were resolved under a COT3 agreement.
Whilst the Acas Early Conciliation service provides a useful route for employees, particularly in the light of Employment Tribunal fees, the major disadvantage is the lack of legal advice on hand. Whilst Acas can assist with forging an agreement between the two parties, they do not advise on the merits of potential claims or on the settlement amount – which could consequently render either side out of pocket. This is particularly relevant for employers in the case of negotiating exits with senior employees where the threat of an Employment Tribunal with potentially limitless compensation (for discrimination cases, for example) could see them agree to a settlement figure far beyond that which the potential claim merits.
This ‘legal advice gap’ may cause concern – especially as the contents of Settlement Agreements and COT3s are often very similar. It will be interesting to see whether measures are brought in to address this in due course.
In the meantime, both employers (and employees) should approach COT3s with caution and seek to obtain their own legal counsel on any settlement figure proposed and the terms of settlement. After all, once the agreement is signed there is no going back!