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Compromise Agreements Out, Settlement Agreements In

On 29 July 2013 compromise agreements are to be re-named settlement agreements.

Also from 29 July 2013 the new confidential pre-termination settlement agreements will be introduced. Following the Government’s Resolving Workplace Disputes Consultation in 2011, the Government introduced new legislation contained in the Enterprise and Regulatory Reform Act 2013 which introduces the new legislative changes for the pre-termination settlement agreements, meaning that any offers or discussions about settlement agreements cannot be used as evidence in an ordinary unfair dismissal claim unless there has been ‘improper behaviour’. Pre-termination settlement agreements are still settlement agreements (formerly known as compromise agreements) but represent a new method of allowing offers made or discussions held with an employee with a view to terminating their employment on agreed terms to be inadmissible in ordinary unfair dismissal claims only.

At the moment employers tend to use compromise agreements to manage risk. The most common reasons given for employers asking for a compromise agreement are; to remove an employee for poor performance or misconduct, to avoid a legal challenge to a redundancy, to make it easier to remove senior employees, to make an enhanced redundancy payment, and to help preserve the employment relationship with the employee for instance by avoiding embarassing employment tribunals.

The Government believes pre-termination settlement agreements are the best way for Government to enable employers and employees to approach settlement agreements confidently in a fair and appropriate way. According to the government, it offers a dignified, consensual and mutually beneficial way of ending the employment relationship without risking a long, costly and distressing employment tribunal claim.
At the moment the ‘without prejudice’ principle exists, but is only engaged when there is a ‘dispute’ between the parties, which means that neither party can refer to negotiations or discussions during any future employment tribunal claims because anything the employer says during such negotiations or discussions could potentially be used later in evidence against the employer, for instance, to show that they intended to unfairly dismiss the employee. The ‘without prejudice’ rule does not engage where there is ‘unambiguous impropriety’, such as fraud or discrimination.

New ACAS Code of Practice on Settlement Agreements

The Code is concise, only 24 paragraphs long. It is restricted to setting out what is legally required for the negotiation of settlement agreements and includes a non exhaustive list of ‘improper behaviour’. The Code makes it clear that the previous ‘unambiguous impropriety’ is included in the wider definition of ‘improper behaviour’.

The statutory code amongst other things contains a non exhaustive list of ‘improper behaviour’. ‘Improper behaviour’ according to the ACAS Code is likely to include discrimination on the 9 protected characteristics, all forms of harassment, bullying and intimidation, physical assault or threat of physical assault, victimisation, and undue pressure for instance by allowing insufficient time to consider the offer or unsubstantiated threats of dismissal. Employees are also covered if they threaten the employer’s reputation.

Under the Code there will be no need to complete or even start internal processes before offering a settlement agreement and no actual discussions, letters or meetings need to take place between the employee and employer. There is also no need for the employee to be accompanied at any meetings. Offers do not have to be in writing, although the final agreement must be recorded in writing in the usual way. Employees should be given a reasonable time to consider the offer. It is not uncommon for an employer to set unreasonable time limits for accepting an agreement. The Code states that an employee should be given as reasonable amount of time and as a general rule 14 days is considered to be a reasonable amount of time however the Code suggests only 10 calendar days. Not allowing an employee sufficient time to consider the agreement will not mean that the employee will necessarily be successful in a claim for unfair dismissal. Nor where there is ‘improper behaviour’ will this mean the agreement is invalid.

Anything said or done during the negotiations will however be admissible to the extent that the employment tribunal considers just. Where unlawful discrimination occurs during discussions this could of itself form a claim to an employment tribunal, for instance references to age. Under the ‘without prejudice’ rule both parties must agree if either party wants to refer to confidential information however it is not clear what will be the effect under this new system. The Code also states that an employee is entitled to their contractual notice. However employees are usually entitled to their contractual notice or statutory notice, up to a maximum of 12 weeks, whichever is longer.

All the usual conditions for compromise agreements will need to be satisified, including that the employee must have to receive advice from a relevant independent adviser on its terms and effect.

A new guidance, ACAS Settlement Agreements: A guide, yet to be published will accompany the Code and will provide more detailed guidance with more substantive practical advice, including guidance on good practice for employers to approach settlement within the broader context of management and will include template letters as well as an optional model settlement agreement so that it can be easily updated. The government has scrapped plans to introduce a guideline tariff for compensation to help employers.

As most claims include other aspects other than ordinary unfair dismissal it is unlikely that these new pre termination settlement agreements will have much impact. If there is a dispute the ‘without prejudice’ rule will engage anyway and it is not too difficult for most employers to trigger a dispute by, for instance, invoking the disciplinary procedure. Most employers and lawyers consider that the Government has missed an opportunity here and would have preferred the Government to have looked at making compromise agreements less technical, particularly avoiding having to cite a raft of laws and regulations. Some employment lawyers would even have liked to see them done away with altogether and replaced with something simpler.

If you need expert employment law advice on Settlement Agreements, contact our Settlement Agreement solicitors on 01273609911, or email

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