‘The Compromise Agreement is dead, long live the Settlement Agreement!’

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Today, 29 July 2013, is ’D’ day for a number of much publicised employment law changes – including the ‘ introduction’ of settlement agreements.

Changes relating to Settlement Agreements

Settlement agreements are legally binding contracts which can be used to end an employment relationship, or settle an employment dispute, on agreed terms. Such agreements are voluntary, but provide a mechanism for a ‘safe’ parting-of-the-ways for employer and employee. Once a valid settlement agreement is signed, the employee will be unable to make a complaint to an employment tribunal about any claim specified in the agreement.

Sound familiar? Well yes, it would. Essentially, the ‘new’ settlement agreement is in fact a rebrand of the HR manager’s old faithful, the compromise agreement, right down to the obligation for an employee to obtain independent advice on the terms of the agreement.

However, as well as introducing settlement agreements, the Enterprise and Regulatory Reform Act 2013 (ERRA) also includes statutory provision which allows parties to take part in ‘confidential’ pre termination negotiations. The intention is to make it easier for employers and employees to reach a settlement and hopefully avoid recourse to litigation.

‘We need to talk …’ Section 111A

The ERRA has inserted a new section into the Employment Rights Act 1996. Section 111A provides that any offer made, or discussions held, before the termination of employment, with a view to employment being terminated on agreed terms (i.e. under a settlement agreement), can be made on a confidential basis and cannot be introduced in evidence at tribunal in a subsequent unfair dismissal claim.

Essentially, s111A opens up a new avenue for employers (and employees - although it would be hard to envisage many circumstances in which an employee would seek to use s111A) to explore the possibility of an agreed ‘parting of the ways’. S111A can be used in circumstances where the existing common law ‘without prejudice’ rules would not be applicable, for example where there is no clear on-going dispute between the parties. S111A can even be used where one party is unaware that there is in fact a problem - for example, previously unaddressed performance concerns. However, adopting an out-of-the blue ‘ambush’ approach to settlement offers is unlikely to assist good employee relations going forward, if an agreement can’t be reached! So, before setting the ball rolling, employers should consider the likelihood that a particular employee would ‘agree’ to go and what it is willing to pay/do to achieve this goal. A false start could be counterproductive.

Even where there is an on-going dispute, employers can take a belt and braces approach and seek to operate s111A alongside the current ‘without prejudice’ rules.

Although a useful new tool in the employer armoury, as with the existing without prejudice rules, s111A’s protection is not all encompassing. Employers must still handle any settlement negotiations carefully - there are risks.

Unfair dismissal protection only

The most important limitation of s 111A is that it only covers ordinary unfair dismissal; automatically unfair dismissals (such as whistleblowing, union membership or asserting a statutory right) are not covered, and neither are other types of claim such as discrimination, harassment, victimisation and claims relating to breach of contract or wrongful dismissal.

Improper behaviour

Furthermore, s111A states that if it is shown that there was any ‘improper behaviour’ during settlement discussions, then anything that was said or done in respect of pre-termination negotiations will be inadmissible in evidence at tribunal in an unfair dismissal claim to the extent that the tribunal considers it ‘just’ (see below).

ACAS Code of practice, guidance, model agreement and letters

ACAS has produced a new Statutory Code of Practice on Settlement Agreements (‘the Code’), which seeks to provide further clarity on when and how employers can make settlement offers and how section s111A and the existing without prejudice rules interact. Although the Code has statutory effect and employment tribunals will take it into consideration in their deliberations, a failure to follow the Code does not give rise to a stand-alone claim.

The Code provides examples of what would amount to ‘improper behaviour ‘ for the purposes of s111A. This includes all forms of harassment, bullying and intimation – including through the use of offensive words or aggressive behaviour - and discrimination on the basis of age, sex, race, disability, sexual orientation, religion or belief, transgender, pregnancy and maternity, marriage or civil partnership. ACAS emphasises that the list in the Code is not exhaustive and ultimately what amounts to ‘improper behaviour’ will be for a tribunal to decide on the facts of a particular case. Certainly, threatening to dismiss an employee in any event without further due process if they don’t enter into a settlement agreement would amount to ‘improper behaviour’. ACAS is at pains to emphasise that s 111A is not designed as a vehicle for employers to ride rough-shod over good employment practice. Employers would be advised to err on the side of caution in their conduct during settlement discussions as tribunals may well set the ‘improper behaviour’ bar lower than the average employer might expect. Hopefully additional ACAS Guidance will provide further clarity (see below).

The Code also clearly expects that employees will be accompanied to any meeting held as part of pre-termination discussions by a colleague or trade union official – although this is not a legal requirement.

10 day ‘consideration’ period

The Code makes reference to the parties being given a ‘reasonable’ period to consider a proposed settlement agreement. What is ‘reasonable’ will depend on the circumstances of the case. In its Code, ACAS has suggested a general rule of 10 calendar days for an employee to consider the terms of a proposed formal settlement agreement - unless the parties agree otherwise. For many employers, who might be used to executing compromise agreements on a pretty tight turn around, this might seem like an unwelcome delay. However, an employer looking to limit the suggested consideration period would be advised to obtain written confirmation that the employee has freely agreed to a shorter time frame. Failure to do so could result in an assertion of ‘improper behaviour’ by denying the employee sufficient time to consider an offer before acceptance/rejection.

Awaiting further guidance

Notwithstanding that s111A is now in force, ACAS has not yet published its finalised Guidance on settlement agreements. The Guidance, which is promised imminently, will hopefully add some more flesh to the Code as well as provide examples of how settlement negotiations might operate in practice.

Usefully, ACAS have confirmed that the Guidance will be accompanied by a model settlement agreement as well as template letters for employers to use during pre-termination negotiations.

Next steps

We have updated our EEF documentation on our website to reflect the legislative changes coming into force today. We will undertake a further review following the publication of ACAS’s guidance on settlement agreements and will make any further necessary amendments.

We will also make ACAS’s proposed template letters available to members via our Essential HR Documents on the web.

Members who routinely use their own form of compromise agreement should, if they have not already done so, re-name these agreements ‘settlement agreements’. They should also review them to ensure that they comply with the statutory requirements of the ERRA and the provisions of the ACAS Code of Practice relating to a valid settlement agreement.

In our view, if a compromise agreement has already been issued prior to 29 July, but isn’t finalised until after 29 July, it should still be valid, even if it doesn’t specifically refer to it being a ‘settlement’ agreement – provided that it recites the relevant statutory provisions for effective waiver of specified claims and confirms compliance. Contact your EEF adviser if you require assistance.

Using settlement agreements to the best advantage - national seminars

We are running a national series of seminars in the Autumn – ‘Ending the Employment Relationship: Off the record or by the book?’ .These seminars will explore the legal pitfalls, as well as best tactics to adopt when seeking to terminate the employment relationship. We will be looking at a variety of situations, such as underperforming employees with good appraisals, employees approaching retirement and employees whose relationship with colleagues has broken down.

We will also consider when you might want to make use of the new statutory settlement provisions and how these might interplay with current ‘without prejudice’ rules. When might it be best to follow formal procedures? You will be given the practical tips and tools to help you get the best outcome for your company, whichever route you choose.

Due to the exceptionally high demand for places, we have now added additional dates to our seminar schedule.

Click here for further information and to book your place

Other key employment changes in force from 29 July

Alongside the new settlement provisions, other key employment changes coming in from today include:

  • Employment tribunal fees - for the first time in their history, employment tribunals will start charging fees [see our previous briefing – Introduction of employment tribunal fees . It will be interesting to see if there is a wave of claims coming through shortly from employees who were determined to beat the 29 July deadline and avoid fees.
  • Revised employment tribunal rules - the new Employment Tribunals Rules of Procedure come into force simplifying and streamlining the process of dealing with tribunal claims.
  • New unfair dismissal compensatory limit – the unfair dismissal compensatory award limit is the lower of the statutory cap (currently £74,200) or one year’s gross pay.

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Media Team 020 7654 1576

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