When should an Academy Trust consider a settlement agreement?

Settlement agreements can be a legitimate, value-for-money tool for resolving employment disputes provided trusts follow the Academy Trust Handbook (ATH) and the Department for Education’s approvals regime to the letter. This 2025 update highlights when a settlement is worth considering, and the governance steps that keep boards, accounting officers and CFOs on the right side of public-money controls.

The right use-cases

Consider a settlement agreement when:

• Litigation risk and defence cost are materially higher than a sensible, evidence-based settlement range. ATH requires you to weigh legal prospects and total defence cost before committing to any offer. If prospects of winning are good, do not offer settlement.

• There’s a relationship breakdown (e.g., senior exit) where continuing employment is untenable and capability or conduct processes would be lengthy, disruptive or costly, especially across multiple schools.

• Long-term sickness/PHI, redundancy bumping, fixed-term non-renewal or restructuring scenarios present manageable, quantifiable risk that can be resolved cleanly.

• Grievance/whistleblowing has been handled properly and you are not trying to suppress protected disclosures (see “Confidentiality & NDAs” below).

Avoid settlement where:

• It could be seen as a reward for failure (gross misconduct or clear poor performance with robust process followed), unless legal advice shows the trust would likely lose due to procedural error.

The approvals regime every trust must plan around

Before you float figures, understand your approvals and delegated limits. From 1 September 2025, the ATH (updated 22 Oct 2025) makes the following DfE approvals mandatory before any offer is made where:

• Non-statutory/non-contractual element is £50,000 or more (gross). 

• Exit package is £100,000 or more and includes a special severance payment.

• The employee earns over £174,000 (gross). GOV.UK

DfE’s Guide to academy trust severance payments restates these thresholds and the process, including where a Notice to Improve removes delegated authority entirely. Use the DfE submission template and allow time for HM Treasury escalation where required.

Value-for-money test. Boards must document: (i) prospects at tribunal, (ii) total defence costs (time, management distraction, reputational impact), and (iii) why the proposed figure is less than likely tribunal award. Keep a clear, legal-advice-backed business case.

New in 2025: confidentiality clauses now need DfE consent

From the 2025 ATH: confidentiality clauses associated with staff severance are categorised as “novel, contentious or repercussive” and must not be used unless the trust has prior DfE approval. They must never curtail whistleblowing rights under PIDA 1998, nor prevent DfE obtaining information it needs. Build this into timelines—last-minute deals now risk delay without that consent.

Sector press has already flagged the operational impact of this tweak expect more gatekeeping around confidentiality terms in staff exits.

Process discipline: how to run a compliant settlement

1. Protected conversation / without prejudice: Use s.111A ERA and the ACAS Code of Practice on Settlement Agreements; give the employee a reasonable period to consider terms (ACAS says 10 calendar days is a sensible benchmark) and signpost the right to independent legal advice (a statutory requirement).

2. Scope and structure:

   • Separate contractual/statutory sums (salary to termination, PILON if used, accrued holiday, statutory redundancy) from non-contractual (special severance) elements only the latter count towards the £50k approval trigger, though the whole package informs the £100k exit-package test.

   • Draft a neutral factual reference and agreed communication lines.

   • Add required carve-outs: protected disclosures (PIDA), reporting to regulators, and statutory rights that cannot be waived.

3. Confidentiality: If included at all, obtain DfE approval first (see above). Use tight, proportionate drafting that does not inhibit lawful disclosures or DfE oversight.

4. Governance pack (board/AO/CFO):

   • Legal advice on merits, quantum and VFM rationale.

   • Business case benchmarking likely ET award vs proposed figure.

   • Equality and whistleblowing assessment (to evidence you are not masking wrongdoing).

   • Approval evidence (DfE response, and HM Treasury where escalated).

5. Disclosure & audit trail: Make the required accounts disclosures (aggregated and itemised where relevant), keep your documentation audit-ready, and be alive to NAO scrutiny.

Practical scenarios in schools and MATs

• Capability / performance at senior level: Long runway to exit, stakeholder distraction, and PR risk can justify a tightly-scoped settlement—if the VFM case is clear and no reward for failure arises.

• Long-term sickness: Where prognosis is uncertain and adjustments exhausted, a pragmatic exit may reduce cover costs and timetable disruption. Document OH evidence and operational impact.

• Complex grievances / relationship breakdown: Provided investigations have been handled properly, a settlement can prevent escalation while preserving pupil focus—again, only if VFM is demonstrable.

• Restructuring / redundancy: A settlement might tidy up ancillary risks (e.g., selection complaints), but do not pay more than statutory/contractual entitlements without a clear legal risk case.

Red flags and common pitfalls

• Offering terms before checking approvals (e.g., £50k+ non-contractual element or exit package ≥£100k): this can force a humiliating row-back. Build a DfE-approval checkpoint into your process map.

• Using confidentiality wording without DfE consent from 2025: treat as NCR and seek approval first.

• Poor documentation: Absent or weak legal merits analysis, missing VFM comparison, or no equality/whistleblowing consideration. DfE can claw back unjustified payments.

• Paying for failure: Settlements perceived as rewarding misconduct/poor performance will not pass ATH muster.

• Non-compliant process: Rushing the employee, not signposting independent advice, or blurring statutory vs non-contractual elements invites challenge (and poor optics).

Key sources (bookmark for your CFO and company secretary)

• Academy Trust Handbook 2025 (effective 1 Sept 2025) – delegated authorities, special severance rules, and new confidentiality clause approval requirement.

• DfE Guide to academy trust severance payments – thresholds, process, Notices to Improve implications and clawback warning.

• ACAS: Settlement agreements & Code of Practice – how to run protected conversations, reasonable consideration periods, and independence of legal advice.

• Sector coverage on the 2025 confidentiality tweak (helps with internal briefing and timing expectations).

Final word

Used judiciously and only after meeting the ATH’s tests and the DfE approvals settlements can spare trusts the cost and distraction of litigation while protecting pupils and standards. The golden rules: evidence the VFM case, separate the contractual from the non-contractual, secure approvals early (including for confidentiality), and keep your audit trail immaculate.