Settlement Agreements vs COT3: What Is the Difference and Which Applies to You?

Both settlement agreements and COT3s resolve employment disputes without a tribunal hearing — but they work in entirely different ways. Understanding which applies to your situation could be the difference between a binding deal and a missed opportunity.

What Is a Settlement Agreement?

A settlement agreement (formerly called a compromise agreement) is a legally binding contract between an employer and an employee. It brings an employment dispute — or the employment relationship itself — to an end on agreed terms. In exchange for a financial payment, the employee agrees to waive specific legal claims they could otherwise pursue at an Employment Tribunal or in the civil courts.

Settlement agreements are governed by section 203 of the Employment Rights Act 1996 and related statutory provisions. For a settlement agreement to be valid and legally binding, a number of strict conditions must be satisfied.

The Legal Requirements for a Valid Settlement Agreement

For a settlement agreement to be enforceable, the following requirements must all be met: the agreement must be in writing; it must relate to a specific complaint or proceedings; the employee must have received independent legal advice from a relevant independent adviser (typically a qualified solicitor) on the terms and effect of the agreement; that adviser must be identified in the agreement and must have a current contract of insurance or indemnity in force; and the agreement must state that the conditions in section 203 ERA 1996 are satisfied.

The independent legal advice requirement is the most critical. An employee cannot validly sign away their statutory rights without first obtaining advice from a solicitor or other qualifying adviser. This is not optional — it is a statutory requirement, and without it the agreement is unenforceable.

What Is a COT3?

A COT3 is a settlement agreement brokered through ACAS (the Advisory, Conciliation and Arbitration Service) during the Early Conciliation or conciliation process. The name derives from the ACAS form on which the settlement is recorded. Unlike a privately drafted settlement agreement, a COT3 is concluded through an ACAS conciliator acting as a neutral third party.

A COT3 can be reached at any point during the ACAS Early Conciliation period, or later during Tribunal proceedings once a claim has been lodged. The terms are agreed between the parties — employer and employee — through the ACAS officer, who then records the terms on the COT3 form. Once both parties have agreed to the terms and ACAS has recorded the settlement, the COT3 is binding.

No Independent Legal Advice Required for a COT3

This is perhaps the most significant distinction. A COT3 does not require the employee to obtain independent legal advice before the agreement becomes binding. The ACAS conciliator is not the employee's legal adviser — they are a neutral facilitator — and there is no statutory requirement for the employee to take advice before agreeing terms through ACAS.

This can be problematic. Employees who agree terms through ACAS without taking independent advice may not fully understand the value of the claims they are settling, whether the payment offered is fair, or whether any conditions attached to the settlement are reasonable. Once a COT3 is signed, it is extremely difficult to challenge.

Key Differences at a Glance

Settlement agreements are privately drafted documents, typically by the employer's solicitors, and require the employee to receive independent legal advice before signing. COT3s are concluded through ACAS and do not require any formal legal advice, though taking it is strongly recommended. Settlement agreements can be used before or after any Tribunal proceedings begin. COT3s are specifically linked to the ACAS conciliation process — either Early Conciliation or conciliation during live Tribunal proceedings.

Settlement agreements can cover a wider range of terms and protections, including post-termination restrictions, confidentiality obligations, agreed references, and tax treatment of payments. COT3s are typically more limited in scope, primarily focused on the financial settlement of the specific claims being conciliated. Settlement agreements are governed by specific statutory conditions under the ERA 1996 and related legislation. COT3s derive their binding force from section 18 of the Employment Tribunals Act 1996.

When Is Each Used?

Employers commonly offer settlement agreements when they wish to bring employment to an end — whether following a redundancy process, a disciplinary or performance process, or a mutual agreement to part ways. The employer will typically pay the employee's reasonable legal fees for taking advice on the settlement agreement. It is standard practice for the employer's solicitors to draft the agreement, though employees should always have their own solicitor review and advise on it.

COT3s arise during the ACAS Early Conciliation process, which is a mandatory step before an employee can lodge a Tribunal claim. Once an employee notifies ACAS of a potential claim, ACAS will offer conciliation. If both parties engage and reach agreement, that agreement is recorded on a COT3. COT3s can also arise during live Tribunal proceedings where ACAS is involved as conciliator. Even where Tribunal proceedings are underway, many cases settle through ACAS conciliation, resulting in a COT3 rather than a formally drafted settlement agreement.

Can You Negotiate the Terms?

Yes — in both cases. Settlement agreements are negotiated directly between the parties (or their solicitors). The starting offer from an employer is rarely the final figure, and a specialist employment solicitor acting for the employee will commonly negotiate an increase in the financial sum, improvements to the reference wording, or the removal of onerous post-termination restrictions.

COT3 terms are negotiated through the ACAS conciliator. The conciliator will shuttle between the parties and attempt to broker agreement. You can instruct a solicitor to advise you and negotiate on your behalf during this process, even though it is not a legal requirement. Doing so is strongly advisable — particularly where the value of your claims is significant.

Tax Treatment of Settlement Payments

The tax treatment of payments under a settlement agreement is more commonly addressed explicitly than under a COT3. Settlement agreements typically apportion payments between categories: payments in lieu of notice (PILON), which are taxable as earnings; compensation for loss of employment up to £30,000, which can be paid free of income tax and National Insurance under section 401 ITEPA 2003; and any element attributable to injury to feelings or a personal injury, which may also benefit from different tax treatment depending on the circumstances.

COT3s are often less detailed in this regard, which can create uncertainty. If a COT3 does not specify how payments are apportioned, HMRC may treat the entire sum as taxable earnings. Taking advice before agreeing COT3 terms helps avoid this outcome.

Can You Be Forced to Accept Either?

No. You cannot be compelled to sign a settlement agreement or agree a COT3. Both require your genuine agreement. However, refusing to engage at all — particularly during the Early Conciliation period — may have procedural consequences if your case proceeds to Tribunal, and Tribunals are entitled to take into account any unreasonable refusal to participate in settlement discussions when considering costs.

It is also important to be aware that offers made in the context of settlement negotiations may be protected by "without prejudice" privilege, meaning they cannot normally be referred to in Tribunal proceedings. Pre-termination negotiations under section 111A ERA 1996 provide additional protection in unfair dismissal cases specifically.

Summary: Which Is Right for You?

If you are in active Tribunal proceedings or have notified ACAS of a claim, a COT3 is the likely route to settlement — and it can be reached quickly. If you are being offered terms by your employer to leave the business, or to resolve a dispute without going to Tribunal, a settlement agreement is the more likely vehicle. Either way, taking specialist employment law advice before agreeing to anything is critical. The terms you accept — or reject — will be binding once concluded.

Employees should never feel pressured into signing quickly. Employers are required to give a reasonable period for an employee to consider a settlement agreement — the ACAS Code of Practice on Settlement Agreements recommends a minimum of ten calendar days. Use that time to get proper advice.

Speak to an employment law specialist

Before you agree to any settlement or COT3, it is worth checking the terms. Book a 30-Minute Advice Session — £99 for direct telephone advice and a written summary, or request a free case review first.

Related guides: How to Negotiate a Settlement Agreement and Offered a Settlement Agreement Instead of Redundancy?.