An employee may consider settling an Employment Tribunal (ET) claim to avoid uncertainty, delay, stress and further expense. However, an employee should not settle simply because their employer threatens to seek legal costs. The general rule is that each party bears its own legal costs in Employment Tribunal proceedings, subject to important exceptions.
This guide explains why an employee might settle with their employer, the case law on costs orders, and how Without Prejudice discussions, S.111A ERA 1996 and independent advice fit into settlement agreements. It concerns Employment Tribunal proceedings in Great Britain; Northern Ireland has a different framework.
Why might an employee settle with their employer?
Employment Tribunal proceedings can involve substantial legal expenses, particularly where solicitors and barristers are instructed. An employee can represent themselves as a litigant in person (LIP), but this still requires time, preparation and careful management of the case.
A negotiated settlement can provide:
- A defined financial payment and greater certainty over the outcome.
- Avoidance of further legal expenses and a quicker resolution.
- Reduced stress and disruption.
- An opportunity to agree a reference, confidentiality provisions and arrangements for ending employment, where appropriate.
Before deciding to settle, compare the offer with a realistic valuation of the claim, the available evidence, potential compensation and the remaining cost of pursuing the case. Consider the non-financial terms as well as the payment.
Employer seeking legal costs: when can a tribunal make costs orders?
Losing an Employment Tribunal claim does not automatically mean paying the employer’s legal costs. Under the Employment Tribunal Procedure Rules 2024, which came into force on 6 January 2025, Rule 73 defines costs and preparation time orders. Rule 74 sets out when the tribunal may or must consider making them.
The tribunal must consider an order where a party or representative has behaved unreasonably in bringing or conducting proceedings, where a claim, response or reply had no reasonable prospect of success, or where a hearing is postponed or adjourned following a party’s application made less than seven days before it begins. Other specified circumstances can also apply, including certain failures to comply with orders.
Considering an order is different from automatically making one. The tribunal must give the affected party a reasonable opportunity to make representations. An employer seeking legal costs must establish the relevant basis; a threat alone does not decide the issue.
Read the Employment Tribunal Procedure Rules 2024, particularly Rules 73–76.
Can rejecting a settlement offer lead to a costs order?
An employee should assess an employer’s offer carefully. Rejecting an offer, or eventually recovering less than the amount offered, does not automatically justify a costs order. Nevertheless, the circumstances of the rejection may be relevant when the tribunal considers unreasonable conduct.
Legitimate reasons for rejecting an offer might include an amount materially below a reasonable valuation, missing disclosure, unaddressed losses or evidence supporting a higher valuation. Record the reasons for your decision and reassess them as the evidence develops.
Key case law on settlement and Employment Tribunal costs
These authorities were decided under earlier procedural rules. Their guidance remains useful, but any application must be considered under the applicable current rules and the particular facts.
Barnsley Metropolitan Borough Council v Yerrakalva [2011] EWCA Civ 1255
Court: Court of Appeal.
Key principle: A finding of unreasonable conduct does not automatically justify recovery of all the employer’s legal costs.
After the claimant withdrew her disability discrimination claim, the tribunal made a substantial costs order. The Court of Appeal considered the litigation as a whole, including criticism of the employer’s own conduct. It restored a costs order but reduced it to 50% of the specified costs.
The decision shows why the nature and effect of unreasonable conduct matter. An employee should assess the conduct of their case carefully without assuming that refusing to settle makes them responsible for every cost incurred by the employer.
McPherson v BNP Paribas (London Branch) [2004] EWCA Civ 569
Court: Court of Appeal.
Key principle: Withdrawal does not itself establish liability for the employer’s costs.
Mr McPherson withdrew unfair dismissal and breach of contract claims before the merits hearing. The Court of Appeal distinguished tribunal costs from the ordinary civil courts’ approach to discontinuance. It upheld liability arising from unreasonable conduct but limited the period covered by the order.
The practical lesson is balanced: withdrawal does not automatically trigger costs, but it does not erase earlier unreasonable conduct. An employee should consider the evidence, merits and specific costs risks before withdrawing or settling.
Kopel v Safeway Stores plc [2003] UKEAT 0281/02
Court: Employment Appeal Tribunal.
Key principle: Unreasonable rejection of a settlement offer can be relevant to costs.
The employer made an offer which the claimant rejected. The EAT explained that ordinary civil litigation rules on settlement offers do not automatically govern Employment Tribunal proceedings. The question was whether the conduct was unreasonable in the circumstances, rather than simply whether the claimant had failed to beat an offer.
An employee should evaluate an offer objectively, taking account of the evidence, likely compensation and weaknesses in the claim. The lesson is to make an informed decision, rather than accept every employer offer.
AQ Ltd v Holden [2012] UKEAT 0021/12
Court: Employment Appeal Tribunal.
Key principle: An unsuccessful claim is not necessarily unreasonable, and the tribunal should take account of a party’s position as a litigant in person.
Mr Holden’s constructive unfair dismissal claim failed, but the tribunal refused the employer’s costs application. The EAT dismissed the employer’s appeal. The costs threshold applies to represented and unrepresented parties, while its application must take account of the litigant’s circumstances.
A litigant in person (LIP) is not immune from costs orders. Equally, a tribunal should not simply judge an unrepresented employee by the standards of a professional lawyer. Take a realistic view of the claim and comply with tribunal directions.
Read the AQ Ltd v Holden judgment.
Without Prejudice and S.111A ERA 1996: what is the difference?
Without Prejudice protection generally concerns genuine attempts to settle an existing dispute. The label alone does not make a conversation protected, and exceptions can apply.
Section 111A of the Employment Rights Act 1996 (S.111A ERA 1996) can protect pre-termination negotiations in ordinary unfair dismissal claims even without an existing dispute. It does not provide the same protection for discrimination claims, automatically unfair dismissal claims such as whistleblowing, or other types of claim. Improper behaviour can also affect protection.
Get advice before assuming that an offer, discussion or costs warning cannot be referred to in proceedings. Read the Acas Code of Practice on settlement agreements.
Settlement agreements, a solicitor and the Adviser Certificate
A settlement agreement normally asks an employee to give up specified legal claims in exchange for agreed terms. Statutory validity requirements include independent advice on its terms and effect, including the effect on the employee’s ability to bring the relevant tribunal claims.
A solicitor is one type of relevant independent adviser. Appropriately certified and authorised trade union advisers can also qualify, subject to the statutory conditions. An Adviser Certificate commonly records the adviser’s involvement; a certificate alone does not replace the required advice or make an agreement valid.
Employers often agree a contribution towards independent legal advice, but payment is not automatic. Confirm the contribution and scope of advice before instructing a solicitor.
Which workplace dispute best describes your situation?
- Unfair or constructive dismissal: your employer dismissed you or made your position untenable.
- Redundancy: you have concerns about consultation, fairness or transparency.
- Discrimination: for example, disability, race, sex or age discrimination.
- Whistleblowing or victimisation: you raised concerns or exercised protected rights and believe you were penalised.
- Employer misconduct or breach of contract: for example, unpaid wages, contractual breaches or an unreasonable disciplinary process.
- Your employer has refused to offer a settlement agreement: you need advice on the available options.
Speak to WELL TU about representation and settlement
Do you need representation with a grievance, dismissal, appeal, whistleblowing concern, consultation about employment changes or another workplace dispute with your employer?
WELL TU’s representatives include CIPD-qualified professionals with legal training who can negotiate Without Prejudice on your behalf. We can arrange independent settlement agreement advice and an Adviser Certificate through an external solicitor, with the employer’s contribution to legal fees agreed where available. We can also discuss representation at an Employment Tribunal through a barrister.
If you do not currently have a trade union representative, call WELL TU on 0116 326 2836 to discuss your situation.
This article provides general information. The decision whether to settle depends on your circumstances and the advice you receive.
By Manjit K
