Constructive Dismissal and Settlement Agreements

You've resigned. Your employer treated you so badly that you felt you had no choice but to leave. Now you're wondering: Can I claim unfair dismissal? The answer might be yes—through a claim called "constructive dismissal." And if you understand this, you're in a much stronger negotiating position when a settlement agreement is discussed. This guide explains how.

What Is Constructive Dismissal?

Constructive dismissal is when an employee resigns, but they're treated as having been dismissed. The law recognises that sometimes an employer's conduct is so bad that resignation is the only reasonable option—and in those cases, the law treats it as a dismissal.

The legal test is set out in Western Excavating (ECC) Ltd v Sharp. An employee is constructively dismissed if:

• The employer commits a fundamental breach of the employment contract
• The employee resigns in response (either immediately or after a reasonable period)
• The resignation is genuinely caused by the breach (not just a convenient excuse)
• The employee doesn't delay too long after the breach (affirmation of the contract)

Key point: You don't have to resign immediately. You can stay and see if things improve, but if they don't, you can still resign and claim constructive dismissal.

What Counts as a Fundamental Breach?

A fundamental breach of contract is one that goes to the heart of the employment relationship. It must be serious—not just a minor grievance or policy breach. Examples include:

Harassment or bullying

Severe, ongoing harassment by your employer or colleagues that the employer doesn't address. If you've complained and nothing changes, this can constitute a fundamental breach.

Discrimination

Treating you unfairly because of a protected characteristic (race, gender, disability, etc.). This is always a fundamental breach.

Substantial pay cuts

A significant reduction in salary without agreement. A 10-20% cut would likely qualify, though context matters.

Major role change

Fundamentally changing your job duties without consent. For example, demoting you or removing key responsibilities.

Unsafe working conditions

Failing to provide a safe workplace or ignoring health and safety breaches.

Failure to pay wages

Not paying you on time or in full is a fundamental breach of the employment contract.

Breach of trust and confidence

All employment contracts contain an implied term of "trust and confidence." Serious breaches—like repeated dishonesty, unfair treatment, or undermining—can be fundamental.

The "Affirmation" Problem

Here's a crucial detail: if you discover a fundamental breach but then continue working without complaining or looking for another job, you might "affirm" the contract. This means you're treating the breach as minor and continuing the employment relationship. If this happens, you can lose your right to claim constructive dismissal.

Example: Your employer cuts your salary by 15% without agreement. You notice but don't say anything. You continue working for 6 months, seemingly accepting the situation. When you eventually resign, the tribunal might say you affirmed the breach—you had the chance to challenge it but didn't, so you can't now claim constructive dismissal.

To protect your position, if you're facing a fundamental breach:

• Complain promptly (in writing)
• Don't accept or acquiesce to the breach
• Make it clear you view this as serious
• Give a reasonable time to remedy (weeks, not months)
• If it's not fixed, resign clearly stating the breach is the reason

Why Constructive Dismissal Strengthens Your Settlement Position

If you have a constructive dismissal claim, you have leverage. Here's why:

You didn't resign voluntarily

For settlement purposes, the law treats a constructive dismissal as a dismissal. This means you have claims:

• Unfair dismissal (if you have 2+ years' service)
• Wrongful dismissal (breach of contract)
• Any other claims (discrimination, harassment, etc.)

The employer knows they're in trouble

If your constructive dismissal claim is strong, the employer faces significant liability. They know:

• An unfair dismissal award can reach £100,000+
• You might also have discrimination claims (with higher awards)
• Costs and tribunal fees apply

This puts you in a strong negotiating position.

Scenario: Settlement Agreement Offered After Resignation

Picture this: You've resigned due to harassment from your manager. A week later, your employer's solicitors contact you offering a settlement agreement. They want you to sign and waive all claims.

What you should do:

• Get legal advice immediately
• Have your solicitor assess your constructive dismissal claim strength
• Understand what you could win at tribunal
• Don't sign the agreement until you know what you're giving up
• Use your claims as leverage to negotiate a better settlement

The employer's opening offer might be £10,000. But if your constructive dismissal claim is strong, you could argue for £25,000 or more. Your solicitor should quantify your likely tribunal award and use that to anchor negotiations.

What to Negotiate

The payment

A constructive dismissal settlement should reflect:

• Your potential unfair dismissal award (if applicable)
• Any discrimination or harassment claims
• Your length of service
• Your salary and notice period
• Your ability to find new work

Reference

This is crucial. If you resigned due to a breach, you don't want your reference to reflect that. Push for an agreed, neutral reference or one that doesn't mention the circumstances.

Confidentiality and publicity

The settlement agreement will likely include a confidentiality clause. This is fine, but ensure it doesn't prevent you from:

• Seeking legal advice
• Reporting harassment or safety breaches
• Discussing the agreement with your family or support network
• Claiming whistleblowing protection (if relevant)

Key Takeaways

• Constructive dismissal occurs when you resign due to a fundamental breach by your employer
• It's a legal equivalent to being dismissed, so you have tribunal claims
• Fundamental breaches include harassment, discrimination, pay cuts, and breach of trust
• Don't delay in resigning or complaining—affirmation can lose your rights
• A constructive dismissal claim gives you significant leverage in settlement negotiations
• Always quantify your tribunal claim before accepting a settlement offer
• Push for better payment, references, and confidentiality terms based on your claim strength

If you've resigned due to poor treatment and you're now being offered a settlement, your negotiating position is stronger than you might think. A constructive dismissal claim can be valuable. Nexa Law helps clients in this situation assess their claims and negotiate settlements that reflect their true value. Contact us for confidential advice.