On 29 July 2013, new rules relating to settlement agreements, formerly known as compromise agreements, took effect. Under the new section 111A of the Employment Rights Act 1996 (the “ERA”), any offers or discussions regarding settlement agreements will be inadmissible in any subsequent unfair dismissal proceedings unless the employer or the employee has engaged in “improper behaviour”.

ACAS has published the Code of Practice on Settlement Agreements (the “Code”), which came into force alongside section 111A. The Code provides guidance on how settlement agreements will work in practice and, so far as possible, assures employers that provided they follow the guidance, they should benefit from the confidentiality protection afforded by section 111A.

What are Settlement Agreements?

Settlement agreements are legally binding contracts which can be used to terminate an employee’s contract on agreed terms. In exchange for waiving the right to bring certain legal claims, the employee will usually receive payment and/or an agreed reference from the employer.

The Code stipulates that certain requirements must be met in order for the settlement agreement to be legally valid:

  • the agreement must be in writing;
  • the agreement must relate to a “particular complaint or proceedings”; and
  • the employee must have received advice from an independent legal advisor.

Pre-termination Negotiations

Section 111A prevents the offer of a settlement, and all negotiations and communications relating to that offer, from being used as evidence in unfair dismissal proceedings unless the employer or the employee has engaged in “improper behaviour”.

Section 111A does not, however, extend to claims on grounds other than unfair dismissal, such as claims of discrimination or breach of contract. When determining claims which fall outside the remit of the section 111A confidentiality protection, a tribunal will be able to consider discussions regarding settlement agreements.

Previous Position: the ‘Without Prejudice’ Rule

Settlement agreements appear, at first glance, to be identical to its predecessor, the compromise agreement; the same requirements must be met in order for the agreement to be legally valid, and they have the same effect of ending the employment relationship and waiving an employee’s right to bring certain tribunal proceedings.

The difference between settlement agreements and compromise agreements lies in the introduction of confidential pre-termination negotiations. Section 111A provides an employer with some additional confidentiality protection in situations where there is no formal dispute.

The ‘without prejudice’ rule prevents written or oral statements made in a genuine attempt to settle an existing dispute, from being brought before a court or tribunal as evidence against the interest of the party which made them. As such, if the settlement agreement is being discussed as a means of settling an existing dispute, the negotiations can be conducted on a without prejudice basis and so are inadmissible in relevant proceedings.

Settlement discussions will not, however, benefit from the ‘without prejudice’ protection in the absence of an existing dispute between the parties, or if one of the parties is unaware that there is an employment problem. Prior to the introduction of section 111A, in such a situation, if the negotiations were to break down and the employee was later dismissed, the settlement offer, and all discussions relating to it, would be admissible in any subsequent unfair dismissal proceedings. In particular, the employee may argue that the settlement offer is of itself evidence that the dismissal was unfair, for example, on the basis that the employer had already decided to dismiss the employee before taking the required steps to dismiss fairly.

In light of the fact that an employer or an employee will often wish to enter into pre-termination negotiations in situations where there is no formal dispute, section 111A has been enacted. By offering protection similar to the ‘without prejudice’ principle in situations where there is no existing employment dispute, the parties will enjoy greater flexibility in using settlement agreements to terminate the employment relationship.

“Improper Behaviour”

The confidentiality protection in section 111A will not apply if the employer or the employee has engaged in “improper behaviour”. In the event that a tribunal finds there to have been improper behaviour, any offer of a settlement agreement, or discussions relating to it, will be admissible to the extent that the tribunal considers it just.

What constitutes improper behaviour is ultimately for the tribunal to decide on the facts and circumstances of each case. The Code sets out a non-exhaustive list of examples of improper behaviour, including:

  • all forms of harassment, bullying and intimidation, including the use of offensive words or aggressive behaviour;
  • physical assault or the threat of physical assault or other criminal behaviour;
  • all forms of victimisation;
  • discrimination on the grounds of age, sex, race, disability, sexual orientation, religion or belief, transgender, pregnancy, maternity, marriage or civil partnership; and
  • putting undue pressure on a party, for example:
    • an employer not giving the employee reasonable time to consider the settlement proposal;
    • an employer threatening that the employee will be dismissed if a settlement proposal is rejected; or
    • an employee threatening to undermine the employer’s reputation if they do not sign the agreement.

Practical Suggestions

Noting that section 111A confidentiality protection only extends to unfair dismissal claims, it is prudent for an employer to enter into ‘without prejudice’ discussions where there is an existing dispute to cover other types of cases such as discrimination, unlawful detriment, and breach of contract (including wrongful dismissal).

In order to avoid a finding of “improper behaviour”, employees should be given a reasonable period of time to consider the settlement proposal. The Code suggests that employees are given a minimum period of ten days to consider the agreement and to receive independent advice, unless the parties agree otherwise.

Whilst not a legal requirement, the Code also suggests that employees should be entitled to be accompanied during any negotiations or discussions by a colleague or trade union representative. From an employer’s perspective, it may be difficult to allow employees to be accompanied as the employer will usually wish to keep any negotiation terms confidential.

Comment

The Government’s intention is that section 111A of the ERA will encourage pre-termination negotiations and increase the use of settlement agreements. Resolving employment disputes by way of a settlement agreement can often provide the most mutually beneficial outcome for the employer and the employee. Employers eliminate the risk of facing tribunal proceedings on any of the grounds covered by the agreement, and can avoid potentially time-consuming disciplinary and capability procedures. At the same time, employees will often receive a payment and an agreed reference from the employer, and will avoid a dismissal in their employment history.

The new rules make it easier for parties to engage in open discussions and explore settlement offers, even in the absence of a formal dispute. By reducing the risk that such discussions may be used as evidence against them in any subsequent unfair dismissal proceedings, employers should feel more confident to engage in pre-termination negotiations and use settlement agreements.

It is questionable, however, whether section 111A will in practice increase the use of settlement agreements. If the parties engage in pre-termination negotiations but a settlement agreement is not ultimately signed, an employer will continue to face the risk of such discussions being admissible in subsequent tribunal proceedings (unlike the continuing application of the ‘without prejudice’ rule where there are failed negotiations relating to an existing dispute). 

In addition, the confidentiality protection only extends to ordinary unfair dismissal claims. To the extent that there are any potential issues involving, for example, whistleblowing, trade unions or discrimination, it would be unwise to expect the offer of a settlement, and all negotiations and communications relating to that offer, to be confidential unless otherwise covered by the ‘without prejudice’ rule. It will be difficult for an employer, when embarking on pre-termination negotiations, to foresee whether an employee will wish to bring a claim on grounds other than ordinary unfair dismissal if settlement is not reached and the employee is dismissed. As such, the use of settlement agreements is likely to be limited to cases of straightforward dismissals where the employer is confident that any potential claims will fall strictly within the remit of section 111A.

A further limitation is that the confidentiality protection may be lifted to the extent that a tribunal considers the parties to have engaged in “improper behaviour”. The tribunals’ wide discretion to determine whether the exception has been engaged, coupled with the lack of statutory definition and the non-exhaustive list of examples of such behaviour in the Code, has created uncertainty over what constitutes improper behaviour. It remains to be seen how broadly or narrowly the tribunals interpret the concept of improper behaviour. If they adopt a broad interpretation, section 111A is likely to have little practical impact in meeting the Government’s intention of increasing the use of settlement agreements.