Settle Your Differences
Published: 1 November 2014
Employers should be aware that important changes have been made regarding the circumstances in which a compromise agreement (now called settlement agreement) may be offered to an employee when considering a parting of ways. The new regime may, in the right circumstances, prove a useful tool for employers to broach a mutually agreed severance deal.
Settlement agreements – what’s in a name?
As of 29 July 2013, Compromise Agreements have been replaced with Settlement Agreements. Effectively this merely amounts to a change of name. All of the legal requirements for a Compromise Agreement remain and independent legal advice on the agreement itself still needs to be sought for the agreement itself to be legally binding.
Pre termination negotiations
At the same time, more importantly for employers, the concept of ‘pre-termination negotiations’ was introduced into law. They are likely to be seen as an attractive option for employers dealing with performance or conduct issues or a possible redundancy situation.
In essence employer and employee will be able to speak about exit terms without there being any pre-existing dispute between the parties within the context of pre termination negotiations. They no longer need to fear discussions taking place in such circumstances becoming admissible in future Tribunal proceedings as was previously the case.
It is important to note that these discussions only apply in cases of potential unfair dismissal (but not automatic unfair dismissal). Where claims of discrimination, breach of contract or whistleblowing are possible, the discussion will not be protected.
Employers also need to ensure that they do not engage in 'improper behaviour' or place 'undue pressure' on the employee as both of these could see the discussion losing its protection and becoming admissible.
The ACAS Code of Practice
ACAS have published a new Code of Practice which in our view should be followed in all cases where pre-termination negotiations or a settlement agreement is anticipated. The Code makes it clear that the employer should be sure there is a genuine basis for discussion (e.g. poor performance or redundancy) and keep an internal note of the reasons to ensure they are not criticised for beginning pre-termination negotiations. The Code also suggests that employers allow employees to be accompanied to such discussions.
The Code states that although an initial offer can be made verbally, the final agreement should be in writing and the employee should have at least 10 days to consider and seek advice on the terms of a settlement agreement.
ACAS have also published an accompanying guide which provides some important pointers for employers.
Although both the ACAS Code and Guide are very helpful, there remain a number of potential pitfalls when using pre-termination negotiations and settlement agreements in the circumstances we recommend legal advice should be sought before entering into such negotiations.
Formal (eg disciplinary, performance management or redundancy) procedures would still need to be followed by employer if a settlement agreement is refused in the case of employees with unfair dismissal rights We recommend legal advice be sought in such circumstances also.
Settlement agreement service
Here at Fletcher Day LLP we offer a specialist Settlement Agreement service to both employers and employees faced with pre-termination and settlement agreement negotiations. We are always happy to offer advice and assistance.