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13 May 2013

Ending an employment relationship using settlement agreements

The Government has published its response to the consultation on ‘Ending the Employment Relationship’, which sought views on facilitating the use of ‘settlement agreements’, a simplified form of compromise agreement to be used when employers wish to negotiate a termination package with an employee without there being any dispute between them.

The aim is to make an offer of settlement an acceptable option to employers and employees as a means of ending an employment relationship. The Enterprise and Regulatory Reform Bill currently before Parliament makes amendments to the Employment Rights Act 1996 to provide that an offer of settlement is inadmissible as evidence to an Employment Tribunal (ET) in any subsequent unfair dismissal claim. In effect, this will extend the existing ‘without prejudice’ regime to situations where no formal dispute has yet arisen.

Existing employee safeguards that apply to compromise agreements – including the requirement to receive independent legal advice – will continue to be upheld. In addition, both parties will be protected against any ‘improper behaviour’ by the other, and in such instances the rule on inadmissibility of the settlement offer will not apply.

Settlement offers will not be admissible in cases of constructive unfair dismissal, so an individual who chose to resign rather than accept an offer of settlement would not be able to use the offer to support a claim that they were unfairly dismissed, unless they could show that the employer’s behaviour was improper. The legislative measure will not apply to contractual disputes, such as wrongful dismissal. Therefore, the fact that settlement was offered would remain admissible in the wrongful dismissal part of any claim.

The legislative change will be underpinned with a Statutory Code of Practice, to give employers and employees certainty as to how to go about negotiating a settlement agreement. This will include a definition of improper behaviour and will set out what a ‘reasonable period of time’ should be for the employee to consider the offer. The Advisory, Conciliation and Arbitration Service (Acas) is consulting separately on the content of the Code of Practice. Failure to follow the Code itself will not make a person or organisation liable to proceedings. However, ETs will take the Code into account when considering relevant cases.
                                                                                                                                                                     The Code of Practice will be accompanied by guidance giving more practical detail on the use of settlement agreements. This will include illustrative examples of improper behaviour and advice on what might constitute ‘undue pressure’ in a settlement negotiation.

Acas has been asked to include a template letter in the Statutory Code, for use where appropriate to the circumstances. Use of the template will not be compulsory, however, as the Government recognises the need for flexibility and that the wording of the letter will sometimes require amendment to reflect the particular situation.

A final template model settlement agreement will be included in the accompanying guidance, so that it can easily be updated to reflect any changes in the broader regulatory framework. The model agreements will provide an example that employers can use or adapt as a template for their own settlement agreement and can also be used in a wider set of circumstances than those reliant on the confidentiality provisions.

The Government has decided not to provide a guideline tariff for settlement agreements. However, the guidance will include considerations that both employer and employee might bear in mind when negotiating a financial settlement.

It is anticipated that the changes will be introduced from summer 2013.

For advice on any recruitment or dismissal matter, contact Kathryn Fielder, senior associate in the employment law practice.

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