COT3: What is it and what you need to know

There may be a dispute with an employee or you think the time has come for a long serving employee to move on for whatever reason. Often there are potential risks involved with removing that person from the business and you want to do everything you can to try and protect yourself and the employee.

Weighing up the business decision 

Employers can feel like they are rewarding an employee’s bad conduct but this can also be viewed as a savvy, commercial and cost-effective decision if you try and take the emotion away from the circumstances. You need to consider the cost and impact to the business of going through a capability process for example, which can take at least 3 months with meetings, preparation, the additional stress and then even an appeal for both parties to consider. A COT3 process is known as early conciliation.

What is a COT3? 

A COT3 is an agreement that records the terms of settlement of an employment tribunal claim (or potential claim) which has been agreed between the employee and employer with the assistance of a conciliation officer employed by ACAS. When the COT3 has been agreed, the tribunal will no longer be able to hear an employee’s claim. This document records the reason for settlement which may be on the grounds of mutual agreement or redundancy for example. This isn’t as scary as it sounds although it is very legally worded because it needs to be.

What about a Settlement Agreement? 

The COT3 agreement is in a far simpler format than a settlement agreement and a COT3 template document is usually amended to fit the needs of your case or employee issue. Settlement agreements will usually have been drafted by lawyers acting for employers and will seek to put far more obligations on the employee. The employee may even ask you for a contribution towards their legal fees. Whilst settlement agreements will usually have to be signed, COT3 agreements can be entered verbally, provided ACAS has been involved.


Apart from details of any financial settlement and agreements, one of the significant clauses in a COT3 document is of course surrounding confidentiality of the agreement. It also includes the discussions leading up to the agreement and the circumstances that got you to that point. This confidentiality clause applies to employees and employers. For employees they are to keep the terms of the agreement strictly to immediate family who are also bound by the agreement, and for employers it is the decision makers surrounding that agreement and the person who may have to facilitate any payment.

Free of tax and national insurance 

The advantage of a COT3 is that part of any financial payment may be able to be made free of tax and national insurance which is an advantage to the employee. The payment is usually made up of an ex-gratia payment (free of tax and national insurance deductions) and then a notice period payment and a payment equivalent to any accrued but untaken holiday which are both subject to the usual tax and national insurance deductions.

The COT3 document is usually used in full and final settlement of any existing or future claims depending on its wording. It is important to note that this does not include any claims for personal injury or claims relating to accrued pension rights if applicable. This protects the employee and employer alike.


Often employees will be worried about prospective employers approaching you for a reference which is sometimes understandable in these circumstances. Often as part of this document PHR can work with you as the employer and the employee to come up with a mutually agreeable reference so the employee can be confident that no matter who requests a reference, the employer must use the agreed document as part of the COT3 agreement.

Last resort 

PHR can help draft any agreements, help with difficult conversations and guide you through the process. It is important to note that this route is used as a last resort and not a way of people managing your business. It can often be a tricky time when you are in this situation with emotions running high for both the employee and employer but PHR can act as an intermediary and guide you through the process and make it as smooth as possible.

Get us involved 

Ideally we would like to help you before we got to the point of discussing a possible COT3. If we can help talk through your employee issue, please do not hesitate to contact one of our Consultants to discuss further.