Settlement Agreements

From 25 June 2013 Compromise Agreements, which for many years, have been the most common way of finalising agreed settlements of claims or potential claims are to be renamed “Settlement Agreements”. However the Government’s measure amounts to more than just this cosmetic change.
 There are new rules (also starting on 25 June) about “pre-termination negotiations,” which include discussions, and any offer made, before the end of the employment, with a view to ending it on agreed terms. During the consultation process for this new law, industry sent a clear message to the Government about the difficulty in approaching an employee when it was felt best for all concerned that the employment relationship should come to an end. The problem is that if the employer instigates a discussion with the employee, intended to lead to the employee’s departure from the organisation on agreed terms, this can easily result in the employee resigning from his employment and claiming constructive dismissal on the grounds that the very nature of the conversation has destroyed his trust and confidence in the company. This is usually because it becomes clear to the employee that he is not wanted. A claim can usually be made even where the discussion has been prefixed by the words “without prejudice”. Accordingly, as it is too risky for an employer to make even a “without prejudice” approach to the employee, in order to come to an agreement, such approaches are usually not made.

 The “without prejudice” rule
It is necessary first to understand exactly what the “without prejudice” rule is. It is often misunderstood to mean that if you say these words at the start of a meeting, or on a letter, then you can say what you like, and it cannot be repeated in proceedings. That is a serious misunderstanding of the rule and has led to sometimes costly and humiliating results when revealed in open court!

The rule is that before the phrase “without prejudice” can give you any protection, there has to be an existing dispute and your offer has to be made in order to settle that dispute. If you have sacked an employee and they have brought a claim against you which you contest, then there is a clear dispute. You can then safely make an offer to settle the dispute in a “without prejudice” letter in the knowledge that the letter cannot be produced to the Tribunal. But when there is no existing dispute, merely an unsatisfactory situation (such as poor performance) then the “without prejudice” rule cannot be brought into play. This is what the Government now intends to relax so that it is easier for employers to start the discussions with an employee, even if there is no actual dispute, in the hope that it might lead to an agreement. If an agreement is in fact reached then that is fine. If it is not, then the negotiations that you might have with the employee should be protected from disclosure, although not unfortunately (as you will see below) in all situations.

The new rule
The new rule will protect pre-termination negotiations intended to bring about the termination of employment on agreed terms but will only apply where the employee brings a claim for unfair dismissal based on grounds that are not automatically unfair ie., capability, conduct, redundancy, illegal employment or some other substantial reason. So if the claim is for anything else, such as discrimination, breach of contract or automatically unfair dismissal, then the discussions (and any offer) are still fully disclosable. This can lead to an absurd situation where the employee brings multiple claims (eg unfair dismissal and discrimination) because then the discussions will be both disclosable and not disclosable at the same time!

If there is any improper conduct on behalf of the employer during the discussions (such as verbal abuse or false allegations) then that too can still be brought to the Tribunals attention and it can decide how much it should take that conduct into account.

The basic new rule, therefore, has significant limitations. It will remain quite risky for an employer to embark on any such discussions with confidence that they will not be repeatable in proceedings later. It seems that the limitations imposed are intended to prevent the rule being abused by an employer by using it inappropriately. For example, if an employee has reported his employers to the authorities about health and safety failures, the employer may well want to get rid of him. If it tries to have protected pre-termination discussions with him raising spurious allegations to try to justify bringing the relationship to an end, this will not work. The employee will know that the discussion has been prompted by his whistleblowing and so in any subsequent claim based on whistleblowing he will still be able to refer to and indeed rely on, the discussions that took place. In a more straight forward situation, however, such as where you genuinely have a poor performing employee, it should be entirely correct to conduct pre-termination “without prejudice” discussions with him, but without the fear that the discussions could later be thrown back at you in a Tribunal claim.

The Government has now issued a Statutory Code of Practice to assist employers using the pre-termination negotiation process.

For more information please contact our Employment Team on T: 0118 912 0257