COT3 or settlement agreement? Spot the differences.

When seeking to settle an existing or potential employment dispute, employers must ensure that they opt for a mechanism that can effectively waive the threatened or potential claims. Although the waiver of contractual claims – such as damages for breach of contract – requires only the basic building block of “valuable consideration”, the rules governing the settlement of statutory claims are far more prescriptive.

Statutory employment claims include most employment related claims, such as unfair dismissal and discrimination. These can only be waived if settlement is:

• agreed through Acas (whether by conciliation or arbitration); or
• recorded in a settlement agreement that complies with various statutory requirements.

Although agreement through Acas can be achieved orally, settlement terms are generally recorded in an agreement known as a COT3. As we explain below, there are important differences between COT3s and settlement agreements in relation to the formalities of the agreement, the advice required, and, last but not least, the potential scope of the waiver.

Below is a summary of the key features of each agreement, and a table highlighting the main differences. We have also written in more detail about settlement agreements here.

COT3s

When an employment-related dispute arises, and the employee wishes to pursue a claim at the employment tribunal, it is compulsory to go through the Acas conciliation process, with an Acas conciliation officer being assigned to the case. Should this result in conciliation by an Acas conciliation officer (whether at an early stage in the process or on the eve of a hearing), a COT3 form can be used to record the terms of the settlement. These would of course include whether the employer admits liability and the details of any compensation being made to the claimant.

Again, it is important to note that oral agreement following Acas conciliation is binding and a COT3 is not legally required. However, the benefits of the certainty of a written agreement, and the additional detail this can cover, go without saying.

What can they cover?

A COT3 can be used to achieve full and final settlement of all claims over which Acas has the power to conciliate. Crucially, it is possible for the COT3 to settle not only present claims (i.e. the specific disputes that have already arisen), but future claims too. Provided the wording of the agreement is sufficiently clear as to the intention of the parties, the COT3 can catch claims or rights not even contemplated at the time the COT3 is entered into. The wording of the COT3 must be as specific as possible, as a future tribunal will interpret the scope of such a waiver narrowly. However, the potential breadth of this type of agreement marks it apart from the settlement agreement.

What are the practicalities?

In practical terms, the employee (or claimant) is not required to obtain independent legal advice to enter into a COT3 agreement. Should they choose to do so, they are responsible for their own costs and the employer does not usually contribute. If they engage a legal representative, the COT3 can be signed by the representative on the employee’s behalf. Once an agreement has been reached, Acas will notify the tribunal to cancel any scheduled hearings.

Although COT3s are more commonly associated with threatened or ongoing tribunal proceedings, their use is not limited to this situation. Acas can facilitate large scale settlement exercises, for example in relation to collective redundancy processes. Given the potential for COT3s to waive claims relating to collective consultation obligations (in contrast to settlement agreements (see below)), together with the fact that independent legal advice is not required for each employee, this can be an efficient process for employers.

Settlement Agreements

Settlement agreements (previously known as compromise agreements), are primarily used by employers and employees to resolve employment disputes when employment has terminated or is about to be terminated. For example, enhanced redundancy compensation may be conditional on an employee entering into a settlement agreement.

Acas does not have to be involved in a settlement negotiation. For this reason, in contrast to a conciliated settlement under a COT3, tribunal claims (or indeed other legal proceedings) are not automatically stayed once a binding agreement is reached. If the employee has proceedings that are already underway, a condition of payment under the settlement agreement will usually be that the employee writes to the tribunal to withdraw them.

What are the formalities?

In order for a settlement agreement to validly waive statutory claims, there are a number of formalities that must be satisfied:

• It must be in writing and signed by both parties.
• Before signing, the employee must have received legal advice from an independent advisor on the terms and effect of the agreement . Although not a legal requirement, the employer usually contributes towards this cost.
• The advisor must be identified in the agreement and have insurance in place.
• The agreement must state that the conditions regulating settlement agreements have been satisfied.
• The agreement must relate to a “particular complaint” or “particular proceedings”. This means that thought must be given to the possible claims that the employee will waive by signing the agreement and the claims must be clearly identified in the agreement.

What is the potential scope?

This last point, relating to the breadth of the potential waiver, is an important point of differentiation with a COT3. Although tribunals have described it as an ‘extravagant result’, COT3s that are sufficiently clear can waive future claims of which the parties are not yet aware. The potential for general waivers of claims relating to future events in settlement agreements, however, is more uncertain. We wrote last year about the Employment Appeal Tribunal’s decision in the Bathgate case (see here) which found that settlement agreements can not waive future claims when the cause of action hadn’t arisen on the date of the agreement. An earlier EAT case had suggested that this outcome could be achieved if sufficiently clear wording, but the Bathgate case cast doubt on this.

The case also called into question, albeit not conclusively, the practice of listing all theoretical potential complaints (rather than just those which have been asserted) as included in the waiver. In light of this, it’s important to ensure that consideration is given to what is appropriate to include on a case-by-case basis. Claims that are no more than a remote possibility may be better left out.

On the question of breadth more specifically, there are certain statutory claims that cannot be waived by a settlement agreement but would be within the scope of a COT3. These are:

• claims for failure to inform and consult with appropriate representatives about proposed collective redundancies; and
• claims for failure to inform and consult about a TUPE transfer.

Claims which can be waived under neither agreement are addressed in more detail here.

Northern Ireland

Employers should also note that different requirements apply in relation to waiving statutory employment claims in Northern Ireland. These claims can only be waived if settlement is agreed through the Labour Relations Agency, where the equivalent of a COT3 is a CO3 agreement, or recorded in a Compromise Agreement (as opposed to a Settlement Agreement) complying with various statutory requirements.

Comparison table

While the differences between these two options may not seem significant, they are worth bearing in mind when there is scope to choose between the two.