Waltham Forest Council in north-east London has agreed to protect the salaries of six staff who faced losses of pound;3,000 a year after the Section 11 service - for children who speak English as a second language - was replaced by the new ethnic-minority and travellers' achievement grant.
The authority was one of several challenged by the National Union of Teachers, which now hopes others will reach an agreement. Under Section 11, staff worked in council language support units, but the new grant goes directly to heads. The units weredisbanded and staff were told to take up posts with schools which refused to match their old salaries.
The Waltham Forest case was the first to reach a full industrial tribunal, but the council agreed a settlement on Tuesday, moments before the was to start.
Graham Clayton, the NUT's solicitor, said: "We challenged on the basis that there was no need to dismiss people when there was obvious scope for their work to continue."
The union also claimed unfair dismissal, breach of contract and racial discrimination. A Waltham Forest spokeswoman said the council admitted no liability, but had used its discretion in settling.