employment law

Settlement Agreements

In 2013, the Government introduced new legislation regarding the use of ‘settlement agreements’, a form of agreement. They are to be used when employers wish to negotiate a termination package with an employee without there being any dispute between them.

Prior to July 2013, settlement agreements were known as compromise agreements.

As part of the over-haul, there are new standard settlement agreements. ACAS has published a new code and guide. There is new legislation concerning the use of evidence about settlement agreements in certain employment tribunal hearings.

These reforms are the included in The Enterprise and Regulatory Reform Act 2013 (ERRA 2013).

The act has made some significant changes to employment law and practice, some of which came into force on 25 June 2013 but the regulations about settlement agreements took effect from 29th July 2013.

Why the change of name from “Compromise Agreement” to “Settlement Agreement”?

The government thinks that the word ‘settlement’ better reflects the purpose of the agreement.

The aim is to make an offer of settlement an acceptable option to employers and employees as a means of ending an employment relationship.

Settlement agreements are similar to compromise agreements as they:

• are legally binding contracts, which will bring the employment relationship to an end on agreed terms

• waive an individual’s right to make a claim in a court or employment tribunal on matters that are specifically covered in the agreement

• include an offer of some form of payment and a reference

Employees continue to need independent legal advice for the agreement to be considered legally binding.

Employment tribunal evidence

Now the new legislation has been introduced, offers and discussions of a proposed settlement cannot be used, or referred to, in unfair dismissal claims at an employment tribunal.

Thus an employer will be allowed to approach an employee freely about a potential termination of employment without any prior disciplinary process.

Under the previous rules, if an employer approached an employee out of the blue to have a frank discussion about ending their employment, the employee could use this as ammunition. They could claim constructive dismissal (assuming they have the qualifying period of service) by arguing that their continuing role is untenable.

Under the new legislation on settlement agreements, evidence of these pre-termination negotiations will be inadmissible in unfair dismissal employment tribunal claims, or claims in court. Unless there is fraud; undue influence; unambiguous impropriety, such as discrimination, or a party has behaved ‘improperly’ in those negotiations.

Although parties should continue to use ‘without prejudice’ in correspondence, this new rule will end the uncertainty as to whether settlement discussions are truly ‘without prejudice’ when there is not an existing dispute between the parties.

Claims that relate to an automatically unfair reason for dismissal such as whistle blowing are not covered by the new confidentiality provisions, nor are claims for discrimination.

The role of ACAS

The Advisory, Conciliation and Arbitration Service (ACAS) has been asked to produce a statutory Code of Practice on Settlement Agreements in support of this legislative change.

ACAS has produced a set of draft standard settlement agreement documents and letters for employers to use, as well as providing a code of practice and guide on settlement agreements.

Although not a statutory code, employment tribunals will take the proposed ACAS code into account when considering relevant cases.

The Code of Practice gives employers and employees details as to how to go about negotiating a settlement agreement. The ACAS code is accompanied by guidance giving more practical detail on the use of settlement agreements.

This includes illustrative examples of improper behaviour; for example, harassment or intimidation to sign. It also sets out what a ‘reasonable period of time’ should be for the employee to consider the offer and include advice on what might constitute ‘undue pressure’ in a settlement negotiation.

A final template model settlement agreement is included in the guidance. The model agreements will provide an example that employers can use or adapt as a template for their own settlement agreement and can also be used in a wider set of circumstances than those reliant on the confidentiality provisions.

The Government has decided not to provide a guideline tariff for settlement agreements. However, the guidance will include considerations that both employer and employee might bear in mind when negotiating a financial settlement.

Some key points from the code of practice

• Settlement agreements can be proposed by both employers and employees and at any stage of an employment relationship

• It is suggested the initial details of the settlement agreement offer should be set out in writing

• Employers are asked to set out the reason why a settlement agreement has been proposed, for example “because of recent poor performance concerns…” Some template letters which could be used are attached to the code

• Parties must be given a reasonable period of time – a minimum of seven working days is suggested – to consider an offer of a settlement agreement and to receive any independent advice

• If settlement cannot be reached, employers may have to find some other form of resolution, be it through a disciplinary, grievance or performance management process, whichever is appropriate

• Employers should allow employees to be accompanied at a meeting to discuss settlement agreements by a work colleague, trade union official or trade union representative. Although not a legal right, ACAS believes it can be helpful to bring a companion in such situations

Will this standard approach work?

In some simple cases where the reason for dismissal is not disputed, standard documents may help bring employment to an end quickly.

However, most termination scenarios are not so straightforward and simple, standard documents are unlikely to be suitable for all situations.

There will also be issues about how far an employer can depart from standard documents, whilst remaining protected.

It is likely that employers will continue to want their lawyers to be involved in drafting and negotiating agreements to ensure that if payments are being made, issues that are currently covered by compromise agreements continue to be protected in settlement agreements.

Further advice

If you have a query relating to a Compromise Agreement, Settlement Agreement or any other employment law issues, please contact Daniel Zakis or Alison Willis at Wallace Robinson & Morgan solicitors in Solihull and book an appointment for a consultation.

You can contact Daniel and Alison on 0121 705 7571 or by email to danielzakis@wallacerobinson.co.uk or alisonwillis@wallacerobinson.co.uk

Further reading:

The ACAS Code of Practice; difficult or problem employees (Employment Law)

Terminating an employee’s contract of employment (Employment Law)

Settlement Agreements (Employment Law)

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