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Settlement Agreements – More Than One Year On

The employment team meeting to discuss a case

Settlement Agreements replaced Compromise Agreements in July 2013. Whilst most HR Managers have got the hang of the name change, many are not following the Acas Code  of Practice on Settlement Agreements.

Prior to July 2013, employers had limited scope to discuss the possibility of an agreed exit with their employees. To hold a “without prejudice” conversation safely, there needed to be an existing dispute between the parties, litigation was contemplated, and the discussion itself needed to involve a genuine attempt to resolve that dispute.

Case law at that time demonstrated that offers of Compromise Agreements made during grievance or disciplinary meetings were not usually protected by the “without prejudice” rule. As such, often innocent attempts to try and negotiate an agreed exit came back to haunt employers in threatened litigation.

This meant employers were cautious about embarking upon pre-termination negotiations in case the employee saw the offer of a Compromise Agreement as a breach of trust and confidence.

The Enterprise and Regulatory Reform Act 2013 inserted a new section 111A into the Employment Rights Act 1996.  This recognised “protected conversations” and sought to ensure that when pre-termination negotiations are handled correctly, they are inadmissible in ordinary unfair dismissal claims.

The key features are that no dispute needs to exist between the parties, which means that employers can raise the possibility of a Settlement Agreement before deploying management time and resources in starting a dismissal process.  The “protected conversation” can be held at any time. It can be initiated by either the employee or the employer and it can be broached formally or informally.  The term “without prejudice” does not need to be used – what matters is the substance of the conversation.  Most importantly, the employee is not able to refer to protected conversations to show that a capability, conduct, redundancy or “some other substantial reason” dismissal is a sham.

However, the main pitfall is that that protected conversations are admissible in all other types of employment claim – including automatic unfair dismissal claims such as whistle blowing, discrimination claims, wages claims and breach of contract claims.

Also, the protection is not available if there has been improper behaviour by the employer.

The ACAS Code of Practice on Settlement Agreements sets out basic guidance and gives examples of what employers must and must not do.  Thus, an employer who gives an employee insufficient time to consider the offer, or threatens their employee with dismissal if they do not accept the agreement, cannot expect to keep this conversation confidential.

The following are examples of how employers and HR Managers are still getting pre-settlement negotiations wrong:

  • An HR Consultant offered a Settlement Agreement to a female employee who had already raised a grievance about sex discrimination, had a mental health disability as defined by the Equality Act and was disciplined for shouting at a colleague. The compensation offered was minimal and the conversations around this offer were not protected. This left the employer open to claims of discrimination arising from disability, failure to make reasonable adjustments as well as sex discrimination and victimisation. The employee managed to obtain more than 3 x the original offer of compensation.
  • An HR Manager offered a Settlement Agreement to an employee who had raised an informal grievance about bullying and harassment due to his race by his line manager. Disciplinary action was taken around the time he made these complaints in relation to his time keeping despite there being evidence which pointed to this being a capability rather than a conduct issue. His race complaints were not fully investigated and they were never treated as a formal grievance against his manager. This compounded his view that the company were unfairly supporting his manager. In response to the proposed Settlement Agreement he formalised his complaints of discrimination and victimisation and ended up doubling the employer’s original offer of compensation.
  • Many employers have ignored the Acas Code of Practice which states that employees should be given a minimum of 10 days to consider the offer of a Settlement Agreement. This could be cited as an example of an employer using undue pressure or behaving improperly. When reminded of this most employers and HR Managers have extended the deadline for accepting the Settlement Agreement, so that it is reasonable.
  • We are still seeing many offers of a Settlement Agreement coming totally “out of the blue” rather than being offered in conjunction with a recognised formal process. Although the legislation allows for this, it often results in employees being upset and aggrieved by the situation, rather than accepting that a Settlement Agreement may be a preferable route. This can lead to the employer having to increase the compensatory offer as many employers do not want to find themselves in the uncomfortable position of still having to manage an employee who has refused a Settlement Agreement. Employees need to understand why the employer is seeking termination of their employment contract even if they don’t agree with the reason being put forward.

All employees have the potential to raise issues of discrimination as age and sex are protected characteristics. The safest route is to start a fair capability, conduct, redundancy or some other substantial reason process before making the offer of a Settlement Agreement. This ensures tenuous claims of discrimination can be defended as the paperwork supports the real reason why the employer is looking for termination by consent.

Following a fair process, prior to offering a Settlement Agreement ensures that the employer properly investigates the surrounding issues to avoid any unintentional discrimination and also enables the employee to make an informed choice about their future employment.

About the author

Martin Searle Solicitors

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Founded in Brighton in 2004, Martin Searle Solicitors is an award-winning law firm providing specialist legal advice and support in employment law for employers and employees, as well as expert guidance and legal advice in community care law.

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