As from 29 July, compromise agreements will be given a compulsory name change and re-branded as settlement agreements. At the same time a new ACAS code of practice will come into effect.

Background

There is a lot happening on 29 July 2013 on the employment front. This briefing examines the changes the Government is making on that date to promote early settlement of employment disputes. These comprise:

  • Re-naming compromise agreements as settlement agreements.
  • Limited modification of the "without prejudice" rule to cover negotiations between employers and employees before the contract of employment is terminated.
  • A new ACAS code of practice covering settlement agreements.

As well as the above changes, the following changes will also be introduced on 29 July, which are outside the scope of this note:

  • New employment tribunal rules of procedure.
  • The introduction of fees in the employment tribunal.
  • The implementation of an earnings-based cap on compensatory awards for unfair dismissal.

A rose by any other name?

For many years the name compromise agreement has been applied to an agreement that satisfies the statutory formalities necessary to reach a binding settlement of employment protection rights. Without being incorporated into a compromise agreement, any agreement by an employee to forego these rights is of no legal effect.

These legal requirements, although substantially the same for each kind of claim, are scattered across a number of different pieces of employment legislation. Section 23 Enterprise and Regulatory Reform Act identifies some but not all of these provisions, and simply changes the terminology used from "compromise" to "settlement". However, it doesn’t mention the Working Time Regulations or a number of other less well-known provisions.

So why the change? In its response to consultation in 2011, the reasons given by the Government were as follows:

"We believe this more accurately describes their content and will help to avoid any party refusing to sign an agreement on the grounds that they do not want to be seen as ‘compromising’. We also believe that ‘settlement agreement’ is a more widely understood term, being used in the treatment of contract claims."

Back in 2011 the Government was also considering changing the underlying statutory requirements for compromise agreements but these proposals have been dropped, so we have effectively been left with a new name for an agreement with unchanged content.

As a result, while no substantive changes to employers’ standard compromise agreements will be required, they will need to make sure that references throughout the document to "compromise agreement" are replaced by "settlement agreement" where appropriate. Arguably, failure to do so will mean that they no longer comply with the statutory formalities.

Pre-termination negotiations

Under current rules, settlement discussions conducted on a "without prejudice" basis cannot be disclosed in subsequent legal proceedings unless there has been some "unambiguous impropriety" on the part of the person who wishes to keep these discussions confidential. However the without prejudice rule does not apply unless there is already a legal dispute between the parties at the point the negotiations take place. This limitation has been seen as problematic in an employment context, where either party to an employment contract might wish to embark on discussions to end it before any legal dispute has arisen.

As from 29 July a new section of the Employment Rights Act (section 111A) will make some pre-termination discussions confidential even where there is no existing dispute. This new rule will apply only to standard unfair dismissal proceedings; if any other kind of claim is subsequently brought, evidence of these discussions can still be given. There will also be an exclusion for "improper" conduct, which means that an employment tribunal will have power to allow evidence of these negotiations to be given in unfair dismissal proceedings if in its opinion anything said or done was improper, or was connected with improper behaviour.

These important qualifications are likely to mean that this new section will be of limited use in practice. It will rarely be the case that an employer will be confident, when starting pre-settlement negotiations, that a standard unfair dismissal claim is the only legal right an employee will wish to exercise if the negotiations break down and the employment contract is subsequently ended. For instance an employee may also have claims for breach of contract, automatically unfair dismissal or discrimination in these circumstances.

In addition, "improper conduct" is likely to be designate a significantly broader exception than the "unambiguous impropriety" exception that applies to without prejudice negotiations. The new ACAS code of conduct goes some way to clarifying what this is likely to mean. However employers may find some of its best practice recommendations (explored below) unduly restrictive.

ACAS code of practice on settlement agreements

The purpose of the new ACAS statutory code of practice is to explain how section 111A works, and, in particular the scope of the "unreasonable behaviour" exception. As well as the more predictable kinds of bad behaviour (eg harassment, physical assault and discrimination) it mentions "putting undue pressure" on a party. This could include not giving an employee a reasonable time to consider the proposals (the code recommends 10 days) or stating the employee will be dismissed if the proposals are not accepted.

Presumably (although this is not mentioned explicitly) putting undue pressure on a party could also include failing to allow the employee to bring a work colleague or union official to the meeting to discuss the settlement proposals. Although there is no statutory right to be accompanied at such meetings, the code suggests it is good practice.

ACAS settlement agreements guidance

The new code of practice, despite its name, does not address the use of settlement agreements outside the context of section 111A ERA. This will be covered in new non-statutory guidance, which has not been published at the time of writing, but is due out by 29 July.

What’s happening next?

Consultation is still continuing on an ambitious plan to make contact with ACAS compulsory before issuing most types of employment claim. Active participation in the conciliation process will not be compulsory for either side, but the new procedure should mean that at the very least claimants will receive an initial approach from ACAS before being able to launch their case in the employment tribunal. These changes are due to take place next year, probably in April 2014, according to the latest indications from the Government.