The Department for Business Innovation & Skills is currently consulting on a wide range of proposed changes to employment law including on “Ending the Employment Relationship” which, amongst other matters, covers “settlement agreements” and “protected conversations”. Provided the proposals survive consultation, they should make life easier for businesses and investors, including private equity investors, who need to make quick decisions affecting workforces.

Settlement Agreements

English law provides that statutory claims, for example claims for unfair dismissal, can be waived by way of compromise agreement where employees have received independent legal advice. The use of compromise agreements has successfully reduced the number of claims that might otherwise have ended up in court thereby reducing associated legal spend and are regarded as a secure method of preserving confidentiality in the event of a dispute at work provided appropriate employer protections are built in. In certain circumstances, they have also enabled employers to part company with employees without following due process even where the nature of the dispute in question is in its infancy or tenuous in nature.

The Government wants to further promote the use of compromise agreements by rebranding them as “settlement agreements” and targeting associated legal costs.

A template settlement agreement is proposed for use by employers. It is hoped that access to the template will save on time and legal spend. However the proposed template is limited in scope, makes little provision for the protection of employers and does not cover private equity type arrangements such as transfer of a leaver’s shares etc. It is therefore unlikely to be appropriate for anyone other than “lower level” employees in private equity portfolio companies, although it may also be useful where the offer of a settlement agreement is recommended only as a “belt and braces” approach (ie. where a settlement agreement is only being used as a precautionary measure).

Protected Conversations

A more fundamental change is concerned with when employers can safely start “without prejudice” negotiations (referred to as “protected conversations” or “pre-termination negotiations”) during which the offer of a compromise agreement might be made.

Discussions and documents which are “without prejudice” attract privilege meaning that, save for a limited number of exceptions, they are private and will not be disclosed in a court of law. As things stand, if an employer wishes to start without prejudice discussions and part company with an employee by way of compromise agreement, care needs to be taken that there is, in fact, an existing dispute between the parties. If there is no dispute the discussion will not be protected by the “without prejudice” rule and could be evidence of constructive dismissal.

Whilst, in our experience, identifying when a dispute has started no longer poses a significant issue in practice, Government research suggests otherwise and that statutory change is needed. In response, the Government is now proposing to extend the circumstances in which “without prejudice” discussions can be started and offers of settlement made, by introducing the statutory concept of “protected conversations” or “pre-termination negotiations” and doing away with the concept that the parties need to be in dispute for those discussions to be “without prejudice”.

The intention is to give employers more confidence that, provided they comply with a new statutory code, settlement discussions and offers will not be used in evidence in unfair dismissal claims although care will need to be taken as this protection would not apply for other claims such as claims of discrimination. ACAS has responsibility for developing the new code and the following is proposed:

  • settlement offers to be made in writing and to set out what happens if the employee rejects settlement;
  • no “undue pressure” to be put on a party to accept the offer of settlement;
  • no discrimination or other “improper behaviour” by an employer when making an offer of settlement and no victimisation of employees.

These “protected conversations” are clearly a step in the right direction for business. In theory and if handled correctly, incoming private equity owners of a business could more easily turn their attention to adjusting staff levels if appropriate without the need for some kind of pre-existing dispute, concerns over performance or misconduct. This would be seen as a welcome development by employers.

However, the changes are not perfect and may give rise to uncertainty and disputes in other areas, for example:

  • what will constitute “undue pressure” or “improper behaviour”?
  • if an employer puts forward a settlement offer to an employee who is frequently absent and it turns out that the reason for the absence is a disability then the employee could argue they have been discriminated against and that the “protected conversation” is not in fact protected (ie. is not on a “without prejudice” basis);
  • if an employee does not accept the settlement offer, a formal process will still need to be followed if the employer wishes to avoid the risk of claims;
  • if there was no real dispute in existence and the offer of settlement is rejected, it might give scope for argument about whether a relationship of “trust and confidence” still exists between the parties (potentially entitling an employee to resign and claim constructive unfair dismissal).