June 24, 2013

A Simple Way to Bring Employment to an End?

The Enterprise and Regulatory Reform Bill received Royal Assent on 25th April 2013, making it the Enterprise and Regulatory Reform Act 2013.

One of the proposed employment law changes being introduced by the Act is the renaming of a ‘compromise agreement,’ which will become known as a ‘settlement agreement.’

A compromise agreement is a legally binding agreement in which an employee agrees not to pursue particular claims at an employment tribunal in relation to their employment or its termination, typically in return for a financial settlement.

What’s changing?

In addition to the name change, ACAS has been asked to prepare a statutory Code of Practice to accompany the new legislation. The aim of the Code is to provide guidance to employers and employees who choose to negotiate a settlement agreement. The Code will provide a clear explanation of the law as it relates to the confidentiality provisions of such negotiations.

Some leading commentators suggest that the reason for the proposed name change from ‘compromise agreement’ to ‘settlement agreement’ is a way of addressing the perception that there has been any compromise between the parties in reaching an agreement. The Government has indicated that it considers the term ‘settlement agreement’ to be more widely understood by all.

The intention is that agreements will be simplified so employers can offer a settlement without that offer or related discussions being admissible in any future ‘ordinary’ unfair dismissal proceedings. The protection will apply even where no formal dispute has yet arisen.

It is important to note, however, that claims that relate to an automatically unfair reason for dismissal (such as whistleblowing, union membership or asserting a statutory right) are not covered by the confidentiality provisions. Neither are claims of discrimination, harassment, victimisation or other behaviour prohibited by the Equality Act 2010, or claims relating to breach of contract or wrongful dismissal.

Why is this type of agreement necessary?

Currently, a compromise agreement provides a possible way out of situations where the relationship between an employer and employee has irretrievably broken down. This may be due to a dispute between the two parties, or alternatively, where an employee is being performance managed and is unlikely to make the required improvements.

The advantages for an employer are that it can significantly limit the chances of an employee making a claim once an agreement has been signed. This may provide reassurance if there has been any shortfall in the procedure or process followed by the employer.  The employer can also avoid their private business affairs coming into the public domain at an employment tribunal.  They can also set out any relevant terms and conditions relating to the termination of employment, such as provisions relating to confidentiality or contact with clients, and conditions preventing the employee speaking negatively about the organisation on leaving etc.

It can also be beneficial for the employee, as they are normally able to walk away with a tax free lump sum (anywhere up to £30,000) on leaving the organisation. The agreement results in a more amicable end to their employment and they can avoid the stress of a tribunal appearance where they have no guarantee of a successful outcome.  To be legally compliant, an employee must receive independent legal advice from a suitably qualified representative. To this end, employers normally pay any reasonable costs incurred by the employee in relation to receiving this advice.

The use of such an agreement is not without risk. Where negotiations to end the employment relationship have been unsuccessful, there have been a number of cases where the content of ‘without prejudice’ discussions have been considered as admissible evidence in later tribunal proceedings.

What are the risks of using a settlement agreement?

Once the new legislation is introduced, pre-termination settlement offers and negotiations will not remain confidential (and may be admissible as evidence in future claims) where the employer behaves ‘improperly’ or places ‘undue pressure’ on an employee to sign an agreement.   It is anticipated that the ACAS Code of Practice will help to define ‘improper behaviour’ and ‘undue pressure’ and provide more guidance in this area.

While the new settlement agreement may continue to offer an alternative route for employers to end a difficult employment relationship, it must be stressed that in the majority of cases, traditional best practice approaches are the recommended course of action when managing discipline, performance, disputes and grievances.  The need to offer an expensive pay-off is unlikely to be necessary where an issue has been effectively managed in line with recognised HR best practice.  Additionally, NorthgateArinso clients may not receive cover under the provisions of their indemnity insurance should they decide to opt for the settlement agreement route.

Further support and advice

Full assistance can be provided by our NorthgateArinso Advice Line on managing difficult employer/employee relationships, as well as on the use of settlement agreements.  Please call us on 0845 073 0240 and an advisor will be happy to guide you through the process.

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