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A Compromising Position – The Latest Changes To Compromise Agreements

Nadine Jenkins - DAS Law

  1. 25 July 2013
  2. Employment
  3. 0 comments
Reaching an agreement

The introduction of settlement agreements

A new era of pre-termination negotiations will dawn on July 29th 2013.

S14 of the Enterprise and Regulatory Reform Act 2013 inserts the new s.111A into the Employment Rights Act 1996, whereby discussions between an employer and employee with a view to terminating employment on agreed terms are confidential. As a result, compromise agreements, as they are currently known, will be renamed settlement agreements, as laid out in s23 of the Enterprise and Regulatory Reform Act.

The current state of compromise agreements

So what is a compromise agreement? A compromise agreement is a legally binding document where, in return for compensatory payment, the employee will waive their tribunal rights and often agree to termination of their employment. Settlement agreements will be the same as compromise agreements, but will be renamed to something which more accurately describe their purpose. Settlement agreements will need to comply with the same legal rules as compromise agreements.

Employers currently discuss compromise agreements on a ‘without prejudice’ basis with the employee. ‘Without prejudice’ means the settlement discussions cannot be used as evidence at a later date as part of court or tribunal proceedings.

This allows the parties to freely discuss the compromise agreement without fear of repercussions. However, to have the protection of ‘without prejudice’, certain criteria must be met. For example, there must be an existing ‘genuine dispute’ between an employer and an employee, and no fraud, undue influence or “unambiguous impropriety” (for example, blackmail or perjury).

Lifting the veil

In recent years there has been an increase in cases where the veil of ‘without prejudice’ has been lifted and therefore the communications have been admitted as evidence. This has created commercial problems for employers who have wanted to have ‘without prejudice’ discussions. Employers have become fearful that ‘off the record chats’ could incriminate them and give scope for an employee to bring claims such as constructive unfair dismissal or discrimination, etc, as a result.

The government recognised that there are often occasions where either the employer or the employee may want to enter into pre-termination discussions where there is no existing dispute. The government tried to bridge this gap with the concept of “confidential” pre-termination discussions. This was arguably with the intention of encouraging employers and employees to enter into settlement agreements without the fear of what is said being used against them, as there is no prerequisite requirement for a ‘genuine dispute’.

The limits of the change

On the face of it, employers will likely be happy with this development; however, this may only last until the realisation that there are limitations to the new provisions. For example, employers need to be aware that the protection is only attached to unfair dismissal proceedings.

Hence, where there is a claim for automatically unfair dismissal, discrimination, breach of contract and so on, then the usual ‘without prejudice’ rules will still apply. Also, if there is some kind of ‘improper behaviour’, the veil of protection shall once again be lifted.

ACAS has recently published the final draft of their Code of Practice on Settlement Agreements, which briefly explains what must be done for the protection to arise. They will also be publishing an accompanying guide which provides guidance about what is likely to be considered to be “improper behaviour”, which specifies all types of discriminatory behaviour and “putting undue pressure on a party”.

Hence, confidential discussions may still be claimed by the employee to have constituted “improper behaviour”. The risk to an employer is that even if they entered into settlement discussions without any improper or discriminatory intent, there can be no guarantee that an employee will not allege it. It will be up to tribunal judges to decide whether such pre-termination discussions benefit from the “confidential” protection as they currently do “without prejudice”.

Summing up

In summary, the new provisions don’t give employers carte blanche protection, and there is still plenty of scope for a disgruntled employee to argue that communications intended to be off the record are admissible in court. Therefore, lawyers will no doubt still be advising employers to imagine a ‘hypothetical tape recorder’ in the room, and not say anything they wouldn’t want used against them. Ultimately, there has been little development that employers are likely to be satisfied with.

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