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What you need to know about settlement agreements

Posted on 29th January 2013
Briefing note

Remember the Ending the Employment Relationship? Well, on 17 January 2013 the Department for Business, Innovation and Skills published its response to this consultation covering both unfair dismissal compensation and the use of compromise agreements.

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Simon Quantrill Simon
Managing Partner Telephone: 01473 688100

You can read our summary of the response at New cap on compensatory awards for unfair dismissal claims.

Goodbye Compromise Agreements; hello Settlement Agreements

As we have previously mentioned, compromise agreements are to be renamed settlement agreements. The name change is to avoid employees wrongly thinking they are being asked to compromise their rights! Apparently too many employees reject offers for this reason. Really? We don't relish all the redrafting of our precedents and templates to accommodate this change (and we can't even charge for this work).

Here is our list of points to note:

  • You will recall that the idea of "protected conversations" was abandoned back before Christmas but settlement offers will be inadmissible as evidence in unfair dismissal cases only. Discrimination claims are not affected. The idea is that an employer will be able to speak to an employee about an offer to settle without having to worry about making sure the conversation is truly "without prejudice". This is because this tag only applies if there is a pre-existing dispute in play.
  • Thus if an offer is made to an employee and instead of accepting it he or she resigns then the employee will not be able to use the offer in support of a claim based on constructive unfair dismissal.
  • Unhelpfully, in addition to the rule not applying to discrimination cases, protection does not cover breach of contract or wrongful dismissal claims.
  • A new statutory code of practice and guidance will be introduced with the help of Acas. A draft is to be published soon by Acas. It will explain how to use the new provisions. It will focus on principles of good practice which can be departed from where it is sensible to do so.
  • There will be no financial penalty for a breach of the code but presumably the benefit of the inadmissible rule will be lost.
  • Optional template agreements and letters will be provided but they will not have to be used as it is recognised that in many cases, as now, agreements will need to be bespoke.
  • Either party may propose settlement.
  • The reason for the offer being made should be made clear.
  • The offer must be in writing, setting out clearly what is being offered and the next steps if the offer is rejected.
  • No particular procedure or steps need to be followed prior to offering terms of settlement.
  • Employers must give a reasonable period of time to consider and respond to the offer.
  • No undue pressure should be put on a party to accept the offer of settlement.
  • Employees will still need to obtain independent legal advice on the terms and effect of the settlement agreement.
  • The above changes are being introduced in the Enterprise and Regulatory Reform Bill 2013 and should come into effect this summer.

In Practice

I would like to believe that these changes will be a success but I am not so sure. The introduction of a new statutory code of practice runs counter to the government's repeated objective of reducing "red tape" for employers. Up to now the use of compromise agreements has been largely unregulated and shortly employers will have to follow prescribed guidance on how to conduct their negotiations with employees.

I can't help recalling what happened with the statutory dismissal and disciplinary procedures. These resulted in lots of satellite litigation which kept the EAT (and solicitors) busy for years. The scope for history to repeat itself clearly exists here because there is a high risk of disputes arising about whether the provisions of the new code of practice have been followed.

Of course the biggest concern relates to the fact that the concept of pre-termination negotiations being inadmissible only applies to unfair dismissal claims. In many cases the employer will not have any certainty about what claims the employee may seek to bring so will not know if the offer of settlement will remain confidential.

There is also the unresolved issue of how events that flow from an offer will be treated. What will happen if and when an employee raises a grievance about the matters put to him or her during a settlement discussion? Will such matters be allowed as admissible evidence?

At Quantrills we are getting ready for this change. Once all the detail is known we will be publishing a briefing note dedicated to this new development to help employers make the best of this new practice, notwithstanding the anticipated problems.

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