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Settlement offers and a new unfair dismissal cap

28 January 2013

The Government has published its response to the consultation on 'Ending the Employment Relationship'. Associate Chris Bushnell and Trainee Solicitor Wendy Hall consider the action that the Government has decided to take in relation to settlement offers being inadmissible in some claims.

The changes to settlement offers/agreements take place on 29 July 2013.   

Settlement offers to be inadmissible as evidence in unfair dismissal claims

The Government aims to increase the use of compromise agreements by making them easier, cheaper and faster to use. 

In summary, it proposes the following key changes (subject to any further amendments before they are introduced):

a) "compromise agreements" will be renamed "settlement agreements"

b)  settlement offers will be inadmissible in an unfair dismissal case, unless:

  • the party making the offer has behaved "improperly" in relation to it (improper behaviour is not yet defined, but the Government seems to intend it to cover employees threatening to underperform at work until their offer is accepted, as well as employers putting the employee under undue pressure)
  • the employee is alleging automatically unfair dismissal (for example where the dismissal was because the employee made a protected disclosure, or was connected with an application for flexible working or the employee's statutory maternity, paternity or adoption leave), or
  • the issue under discussion relates to an application for costs and the settlement offer letter specifically referred to the right to refer to it on the question of costs.

c) settlement offers will be able to be made by either the employer or the employee and there will be no particular procedure to be followed to make a settlement offer

d) if the settlement offer is not accepted, the employee retains all of their employment rights and the employer would be at risk of an employment tribunal claim in the usual way if it dismissed without a fair reason and having followed a fair process.

It is important to note that the proposals only apply to unfair dismissal claims. Settlement offers will continue to be admissible in other claims, such as wrongful dismissal, discrimination and whistleblowing, unless the offer is are covered by the existing "without prejudice" rule.

The previous proposals for "no fault dismissal" are not being taken forwards. Nor are the proposals for "protected conversations" in a wider sense (ie employers and employees having "frank" conversations which would be inadmissible at a tribunal), although it remains good practice for employers to have regular conversations with employees about issues such as performance in an appropriate manner.

Statutory Code of Practice with supporting guidance

ACAS will develop a Statutory Code of Practice (the Code) and explanatory guidance to explain how settlement offers should be used.  For example, it will explain what constitutes "improper behaviour" and how long an employee should have to consider a settlement offer. The Code will also include non-mandatory template letters proposing settlement which can be used or adapted as desired.

Tribunals will take the Code into account when considering relevant cases, although a failure to follow the Code would not in itself lead to legal liability or a potential uplift in compensation. 

Finally, the ACAS guidance will contain a model settlement agreement, which the Government intend can be used or amended as necessary (although the template is limited and lacks many of the terms an employer would usually wish to include in a compromise agreement). The model settlement agreement will remain optional - businesses can continue to use their existing templates if they wish.

No guideline settlement "tariff"

The Government was considering introducing a guideline tariff for settlement agreements but has now decided not to do so. Instead, the supplementary guidance to the Code will set out the factors that the employer and employee might consider when negotiating financial settlements. The Government has suggested that this might include:

  • the terms of the contract, such as remuneration, notice period and untaken annual leave
  • the length of employment
  • the reason for making a settlement offer
  • how long it would take to follow the full process for a fair dismissal if the employee refused the offer
  • how difficult it would be to fill the employee's post
  • how valuable the employee is to the business
  • how long the employee thinks it would take them to find another job, and
  • the perceived liability of the employer for any potential employment claim.

It is not clear how some of these factors would be helpful to a discussion. For example, an employee that the employer considers to be a poor performer is presumably perceived to be of little "value to the organisation". Yet if the employer proposes a low settlement on that basis, the employee is unlikely to accept it!

For more information please contact Christopher Bushnell, Associate

T: +44 (0)20 7427 6427