Pre-termination Negotiations and Settlement Agreements in the United Kingdom

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New statutory provisions on confidential pre-termination negotiations will come into force in the UK on 29 July 2013. In simple terms, the new provisions permit discussions between employers and employees about terminating employment which cannot be used against either party in a subsequent unfair dismissal claim. This OnPoint examines the new regime and the practical impact which it is likely to have upon employers.

Background

In May 2010, as part of the Coalition Agreement, the Government agreed to undertake a review of employment law. One particular objective of the review was to assist employers to end relationships with employees that are not working out. Following months of consultation about how to achieve this objective, the concept of “confidential pre-termination negotiations” is now being introduced with effect from 29 July 2013. 

There is nothing new about discussions between employers and employees about parting company. The new rules are supposed to make it easier for employers to conduct such discussions. Currently, if an employer wants safely to raise the prospect of an employee leaving, it will wish to ensure that discussions are held on a “without prejudice” basis (which means that the discussion cannot then be referred to in evidence before a court or tribunal). This sounds straightforward but a discussion is only "without prejudice" if there is a dispute in existence between the parties and the discussion is a genuine attempt to resolve that dispute. Often, when an employee just isn’t very good at doing their job or where they do not “fit” with the employer’s business and an employer wants to raise this for the first time, there is no dispute in existence. Whether or not a discussion was really "without prejudice" can often be disputed and can complicate subsequent ligitation if it becomes an issue which the tribunal has to determine. 

Raising an employee’s departure in the absence of a dispute is a risky business. The employee may resign claiming constructive dismissal (on the basis that the individual then knows that the employer wants to dismiss them and this makes his or her position untenable). Alternatively, if the parties are unable to reach an agreement and the employer has to then try to dismiss the employee fairly, the employee may well use the fact that there has been a discussion about a possible departure to attack the fairness of the process and argue that any subsequent dismissal process is futile, pre-determined and therefore unfair.

We often advise employers on how to ensure that a discussion is "without prejudice" and how to minimise the risk of these claims. However, even with the best advice, there remains a risk of dispute about the status of a supposedly without prejudice discussion not least where an employee deploys this agreement for a means of trying to force the employer to pay more money to settle his claim.

For these reasons, at first blush, the new regime should be helpful for employers. 

The New Provisions About Pre-termination Negotiations

The new law is contained in section 14 of the Enterprise and Regulatory Reform Act 2013 which has inserted a new Section 111A into the Employment Rights Act 1996.

The new section is entitled “confidentiality of negotiations before termination of employment” and, for ease of reference, this is what it says in full:

“(1) Evidence of pre-termination negotiations is inadmissible in any proceedings on a complaint under section 111. This is subject to subsections (3) to (5).

(2) In subsection (1) “pre-termination negotiations” means any offer made or discussions held, before the termination of the employment in question, with a view to it being terminated on terms agreed between the employer and the employee.

(3) Subsection (1) does not apply where, according to the complainant’s case, the circumstances are such that a provision (whenever made) contained in, or made under, this or any other Act requires the complainant to be regarded for the purposes of this Part as unfairly dismissed.

(4) In relation to anything said or done which in the tribunal’s opinion was improper, or was connected with improper behaviour, subsection (1) applies only to the extent that the tribunal considers just.

(5) Subsection (1) does not affect the admissibility, on any question as to costs or expenses, of evidence relating to an offer made on the basis that the right to refer to it on any such question is reserved.”

What Is the Scope of the New Provisions?

In theory, the new law allows employers openly to suggest that an employee leaves in return for a settlement package without the fear of the discussion being later used against them. There are, however, three important exceptions to this rule. If these exceptions apply, then the employee can rely on what otherwise would have been protected and therefore not capable of being put before a tribunal in evidence.  

Excluded Claims

Unless the discussions are genuinely "without prejudice" under the existing law (i.e. there is a dispute which the discussion seeks to settle), the protection of pre-termination negotiations only applies in relation to "normal" unfair dismissal claims. Pre-termination negotiations will be admissible as evidence in the many potential claims arising from dismissal other than "normal" unfair dismissal. These claims, such as claims for discrimination, wrongful dismissal and breach of contract, are the ones that tend to be the most valuable. Pre-termination negotiations will also be admissible in evidence if the employee's dismissal would be automatically unfair, for example, if it was because of trade union membership, whistleblowing or asserting a statutory right (Section 111A(3)). Things said or done in the course of pre-termination negotiations can be relied on in support of one of these claims as opposed to a general unfair dismissal claim. 

Improper Behaviour

In conducting pre-termination negotiations, the parties must not engage in “improper behaviour”. If they do, their pre-termination negotiations will only be inadmissible as evidence to the extent that the tribunal considers it just (Section 111A(4)). Employees may therefore try to argue that they can rely on "improper behaviour" to support an unfair dismissal or constructive dismissal claim. 

This stipulation is similar to the rule that discussions which would otherwise be without prejudice will lose that protection if there has been what is known as “unambiguous impropriety”. For example, perjury, blackmail or other “unequivocal abuse of a privileged occasion” do not attract the benefit of the without prejudice rule. While no doubt the precise scope of “improper behaviour” will be the subject of litigation, employers need to be careful how they conduct pre-termination negotiations to avoid losing the benefit of the (albeit limited) protection which they will provide. The draft Acas Code of Practice on Settlement Agreements described below (the "Code") provides some commentary and guidance on the issue of what constitutes improper behaviour. The Code is in likely final form but is awaiting Government approval. 

Costs

The parties to an employment tribunal claim often wish to refer to an offer having been made by one party and rejected by the other in relation to the issue of costs. A  party may seek to argue that the other party acted unreasonably in continuing with proceedings despite a settlement offer having been made. Section 111A(5) clarifies that the introduction of pre-termination negotiations will not prevent parties from rejecting offers made during pre-termination negotiations for the purposes of costs applications.  

Settlement Agreements

The Government has also renamed compromise agreements which, apparently to make them more intelligible and user friendly, are now to be known as Settlement Agreements. Section 23 of the Enterprise and Regulatory Reform Act 2013 provides that references to "compromise"  in all the relevant legislation will be changed to "settlement". No substantive change, however, is made to the rules governing Settlement Agreements. As the Code confirms, for a Settlement Agreement to be legally valid the following conditions must still be met:

  • The agreement 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 on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue that complaint or proceedings before an employment tribunal. 
  • The independent adviser must have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice.
  • The agreement must identify the adviser.
  • The agreement must state that the applicable statutory conditions regulating the Settlement Agreement have been satisfied.
The Acas Code of Practice on Settlement Agreements

The Code is not binding upon employers. Nor, unlike the Acas Code of Practice on Discipline and Grievances at work, will it impact upon compensation if the parties unreasonably fail to follow its recommendations. Employment tribunals may, however, take the Code into account when considering cases where the issue of the status and propriety of pre-termination negotiations is in dispute.

Settlement Agreements

The content of much of the Code (and, particularly, the section explaining Settlement Agreements) will be familiar to employers. The Code, however, does make a couple of rather surprising suggestions about the practice of entering into such agreements. For example:

  • The employee should be given a reasonable period of time to consider the proposed Settlement Agreement. This in itself is not controversial but the Code's suggestion that, as a general rule, ten calendar days should be the minimum period of time allowed (unless the employee agrees otherwise) is rather surprising and, arguably, not particularly practical. When an employer raises the prospect of an employee leaving, this can often lead to acrimony between the parties and the consequent risk to the employer’s business (hence why most employers suggest that the employee should take paid leave whilst the agreement is being negotiated). Allowing an employee ten calendar days to consider the proposal, after which negotiations about the terms of the agreement may not have yet even begun, would drag such discussions out and will lead to increased cost for the employer and potentially give the employee some additional leverage where the employer wants to resolve the situation quickly. 
  • Employers should allow employees to be accompanied at these meetings by a work colleague or a trade union representative. This is unusual, to say the least, in terms of current HR practice and no doubt employees would prefer such discussions (which very often involve criticisms of their performance, conduct or personality) to be held in private.

Improper Behaviour

Section 111A provides no detail about what constitutes "improper behaviour" and the Code states that this is an issue for the tribunal to decide depending on the facts and circumstances of each case. According to the Code, however, the following would constitute improper behaviour:

  • Unlawful discrimination and all forms of harassment, bullying and intimidation, including through the use of offensive words or aggressive behaviour.
  • Physical assault or the threat of physical assault and other criminal behaviour.
  • Putting undue pressure on a party. On the employer’s side, the examples given include not giving the reasonable time for consideration recommended by the Code and saying before a disciplinary process has begun that, if a settlement proposal is rejected, then the employee will be dismissed. However, the Code clarifies that its examples are not intended to prevent an employer setting out in a neutral manner the reasons that have led to the proposed Settlement Agreement and stating the likely alternatives if an agreement is not reached (such as the commencement of a disciplinary process). On the employee’s side, the example given is threatening to undermine the employer’s reputation if it does not sign the agreement (unless this is genuine whistleblowing).

Conduct of the sort set out above is clearly improper and this guidance will therefore not change how we currently advise employers to handle these sorts of conversations. However, since the concept of improper behaviour is new, the approach that tribunals will take to interpreting it remains to be seen. For example, how much pressure will an employer be allowed to place on an employee? Will the repeated instigation by the employer of confidential pre-termination negotiations go too far?

Template Documents

Previous drafts of the Code contained template letters that employers could use to propose departure terms in a variety of situations. After some criticism, they have been removed from the Code and will be contained in non-statutory guidance, which has not yet been published.

Do the New Provisions Achieve the Government’s Aims?

By introducing Section 111A, the Government’s aim was two-fold:

  • To allow employers to manage difficult workplace issues more efficiently and effectively without having to incur substantial sums on legal advice.
  • To enable individuals to leave with their head held high and the certainty of a pay-off, whilst avoiding the uncertainty and stress of taking a case to tribunal.

From an employer’s perspective, the new provisions will provide some greater flexibility in straightforward situations where an employee is not performing up to standard or where the employer comes to the conclusion that it is time for an employee to move on. In those situations, gone will be the days of having to create a dispute, by raising the concern (whatever that might be) formally before a without prejudice situation can be had. However, employers should not get too comfortable. The new provisions do not provide a carte blanche for managers to tell an employee when they would like them to leave the business. Such discussions should always be planned carefully in advance, not least to ensure that the discussion will properly fall within ambit of the new provisions, but also to ensure that whatever is said does not give rise to a claim in itself where there is a risk of claims wider than unfair dismissal, such as unlawful discrimination. In such circumstances, the employer will need to consider whether it needs the greater protection of a truly “without prejudice” conversation if that can be engineered (in which case the detailed provisions of the pre-termination negotiation regime will not apply and the situation will be more straightforward). Managers who think these new provisions make the task of dealing with poor performers is easier will need to be given a serious health warning about the new system and careful training about how to use conduct pre-termination negotiations.

Topics:  Hiring & Firing, Negotiations, New Legislation, Pre-Termination Notice, Settlement, Termination, UK

Published In: Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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