Settlement Agreements – What Has Changed?

Following changes made by the Enterprise and Regulatory Reform Act 2013, as of 29 July 2013 compromise agreements have been renamed ‘settlement agreements’ and new provisions (Section 111A) have been inserted into the Employment Rights Act 1996 (ERA) making settlement agreement discussions inadmissible as evidence in ordinary unfair dismissal cases so that offers to end the employment relationship on agreed terms can now be made on a confidential basis.

Employee safeguards that applied to compromise agreements also apply to settlement agreements. For a settlement agreement to be legally binding, the following conditions must be met:

• The agreement, though not necessarily the initial offer, must be in writing;
• The agreement must relate to a particular complaint or proceedings;
• The employee must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on his or her ability to pursue an Employment Tribunal (ET) claim;
• The independent adviser must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice;
• The agreement must identify the adviser; and
• The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

However, whereas compromise agreements could only be used to resolve ongoing workplace issues, as a mechanism for preventing possible future complaints to the ET, settlement agreements can be used to end an employment relationship on agreed terms.

The communications that take place in order to reach a settlement agreement that relates to an existing employment dispute will normally be on a ‘without prejudice’ basis – i.e. they will be inadmissible as evidence before the court or ET – provided they constitute a genuine attempt to resolve the dispute and there is no fraud, undue influence or other ‘unambiguous impropriety’. Prior to the introduction of Section 111A of the ERA, this ‘without prejudice’ confidentiality did not apply where there was no existing dispute between the parties. The change has been made in order to allow greater flexibility in the use of confidential discussions as a means of ending the employment relationship. Section 111A, which runs alongside the ‘without prejudice’ principle, provides that even where no employment dispute exists, the parties may still offer and discuss a settlement agreement in the knowledge that their conversations cannot be used as evidence in any subsequent unfair dismissal claim. However, the protection will not apply where there is some ‘improper behaviour’ in relation to the settlement agreement discussions or the offer, unless the ET decides that it would be just to exclude the evidence.

The Advisory, Conciliation and Arbitration Service (Acas) has produced a statutory Code of Practice, ‘Settlement Agreements under Section 111A of the Employment Rights Act 1996’, which focuses on the confidentiality aspect of Section 111A of the ERA. This sets out the legal requirements with regard to such agreements and also provides general guidance on best practice, such as a recommendation that employers allow employees to be accompanied during the negotiations by a work colleague, trade union official or trade union representative, together with some examples of what would constitute ‘improper behaviour’ in this context.

In addition, Acas has published a booklet entitled ‘Settlement Agreements: A Guide’, which contains non-statutory guidance (including template letters) designed to help employers and employees understand what settlement agreements are, what their effect is, when they might best be used and how they can be negotiated.

Whether or not these changes will have the desired effect of enabling employers and employees to have honest and open discussions about ending the employment relationship remains to be seen. If a settlement agreement cannot be reached, damage will have been done to the employment relationship, which might make moving forward difficult for both parties. Employers will have to handle the process carefully to avoid being faced with allegations of improper, or possibly discriminatory, behaviour by an employee who wishes to rely on the communications as evidence in an ET claim.

Other measures which came into force on 29 July are the introduction of ET fees, new ET rules of procedure and a 12 months’ pay cap on the unfair dismissal compensatory award where this amount is less than the statutory maximum or overall cap. Where the employee’s annual salary exceeds the limit, the statutory maximum will still apply. The limit on the compensatory award for unfair dismissal currently stands at £74,200 where the event which triggered the claim fell on or after 1 February 2013.