Settlement agreements: a fast-track to dismissal?

Could the introduction of settlement agreements give organisations an easier route to dismissing staff? John Charlton reports.

If proposed legislation goes ahead as planned, it looks as though employers may be waving a cheery goodbye to compromise agreements and a guarded hello to settlement agreements (SAs).

Under the guidance of business secretary Vince Cable, proposals on SAs have been included in the Enterprise and Regulatory Reform Bill (ERRB), which is at the committee stage having had its second reading in June. It looks as though they will replace compromise agreements and give employers access to a structured route to the exit door for employees who are underperforming, minimising, in theory, the risk of unfair dismissal claims.

Gagandeep Prasad, associate at Charles Russell, says that the proposed name change from compromise to settlement “is a way of addressing the perception that there has been any compromise in reaching an agreement”, while the Government considers that “settlement agreement is more widely understood”.

It is very likely, points out Nikki Duncan, partner at Michelmores, that SAs will largely be appropriate in straightforward cases, for instance underperformance, “where an employer hopes to negotiate a speedy exit package which avoids the management time and delay of going through formal warnings procedure”.

Cable says: “The use of settlement agreements is a win-win situation for employers and employees.

“For employers, they will have the certainty that they won’t face a tribunal case where an individual agrees to settle, and the offer of a settlement cannot be used as evidence in a case of unfair dismissal. And for workers, they leave with a cash payment, avoiding the time and stress of a tribunal and the possibility of a reference. In addition, employees would know that they are leaving the job with their dignity intact.”

Respected views

Well that’s alright then. Except, of course, that in legislation and regulations it is detail and application that matter, and we’re still some way off that. Interested parties, such as employers’ bodies and trade unions, are making their views known and it will likely be later this summer before fuller and more reflective details of the legislation will be known. This should include the wording of the draft letters and model templates that the Department for Business, Innovation and Skills will draw up.






quotemarksThe use of settlement agreements is a win-win situation for employers and employees.”


Vince Cable,
Department for Business, Innovation and Skills


Sarah Veale, the TUC’s head of equalities and employment rights, says that unions are anxious to see specific details of employee protections set out in the ERRB.

She adds: “We want to see some wording on some sort of third-party sign-off on SAs by a union representative or a solicitor. That’s crucial for us. We also want to see a right for employees to be accompanied in SAs. We’d then train union reps to handle such situations.”

Manufacturing employers’ body the EEF is pro SAs, although it acknowledges that the proposals need more flesh on them.

In a statement the EEF says: “Settlement agreements are the conclusion of a successful process whereby disputes are settled without the need for external adjudication by a tribunal. They are therefore to be welcomed and have advantages of speed, certainty for both parties, and do not place any burden on the state. Reaching such agreements may obviate the need for pre-claim conciliation and are likely to reduce the anxiety of claimants and reduce the burden on employers in defending claims.”

Regulations and assistance that structure and formalise the SA process should help small businesses that do not have the luxury of an HR department. In a blog, the EEF’s head of employment affairs Tim Thomas says that SAs will “provide a legal basis for the current practice of the smallest businesses where employment matters are typically dealt with in a less formal manner”.

Of course, an informal approach can be fraught with danger, as may an approach based on the use of standardised templates and letters.

David Whincup, head of labour and employment at Squire Sanders, urges caution: “There has been some suggestion that an SA might be based on a publicly available template, but this will not remove the need to ensure that the SA is as comprehensive of possible claims as was the former compromise agreement. Moreover, nothing in the settlement agreement rules removes s.203(3) [of the] Employment Rights Act, which is the section preventing valid compromises of employment claims without external and independent legal advice.”

He adds that if the employer wishes to “procure protections or deal with matters not provided for in the template, it will need to add additional wording. Similarly, if the lawyer consulted by the employee wishes to vary any of the wording to protect his or her client, then further changes could be made at that time.

“It must be borne in mind that there is very little in a current standard form of compromise agreement which is not there for some good purpose. Consequently, I would expect the SA template to evolve very quickly into something indistinguishable from a current compromise agreement.”

It remains to be seen what the templates will cover but it’s a racing certainty that they won’t be suitable for helping to handle more complex cases such as those involving senior employees who hold share options, have had access to business sensitive information, may have to be covered by restrictive covenants, etc. Such cases will almost certainly require legal input above and beyond any standard SA template.

Considered approach

Thought will also have to be given, in the framing of the SA Regulations, to the varying situations and risks that may arise from using them.

For example, what if an affected employee refuses to go along with the process and wishes to continue in his or her post? How far will dialogues and discussions held during an SA process be protected? In what circumstances, particularly tribunal proceedings, should these conversations be afforded protection? How should pay-offs be calculated? Statutory minimum offers are hardly likely to make the employee sign on the dotted line.

Other risks identified by Duncan include conversations that contain a non-protected element such as poor performance allegedly attributable to disability, and reputational risk.






quotemarksFor smaller employers, it should become easier and less costly to unload underperforming employees.”


Sarah Parkin,
Hogan Lovells


According to Nick Jew, DLA Piper employment partner, a very important issue employers must be aware of is that “the new protection for settlement discussions and settlement offers applies only where an employee makes a complaint of unfair dismissal.

“The provisions do not prevent settlement discussions and offers being disclosed in any other proceedings, most notably where an employee brings a discrimination claim or a claim for breach of contract. Even in unfair dismissal cases, the discussions and offer may be disclosed, to the extent that a tribunal considers just, if the tribunal is of the opinion there has been improper conduct.”

He adds: “In practice, the new provisions are likely to create a quagmire of uncertainty for employers.”

Finally, only time will tell whether or not SAs will make life easier for employers. Sarah Parkin, associate at Hogan Lovells, says: “For large employers with HR teams and access to legal advisers, the proposals are unlikely to change much. But for smaller employers without such guidance, it should become easier and less costly to unload underperforming employees.”

Protected conversations

Although protected conversations were not announced with settlement agreements, something very similar must be part of an SA regime. After all, what employer would enter into frank and open discussions with an employee on an SA if he or she thought that those conversations may later be used against them in legal proceedings?

The question is: what will be the scope of conversations given some protection in the ERRB?

The EEF would like the scope of protected conversations to be fairly wide. It wants “the opportunity for successful dialogue enhanced and extended to situations where employment can continue afterwards.

“Providing employers with the certainty that sensitive conversations can be held without increasing the risk of subsequent litigation will increase the prospects of early dispute resolution and may result in employment continuing where it might otherwise have ended.”

The EEF wants protected conversations legislation to cover claims that are not just based on unfair dismissal. “We see no reason why, if safeguards can be put in place to ensure fairness in the context of unfair dismissal, that this should not extend to all heads of claim. Most notable would be those claims based on discrimination, for breach of contract and situations where the current law regards the reasons for dismissal as automatically unfair.”

The Government is consulting and taking input from relevant parties on the scope and application of protected conversations. But, Prasad says: “Although a provision has now been tabled for inclusion into the ERRB, this covers discussions about the termination of employment and relates to unfair dismissal claims only. It is unclear whether this is intended to replace protected conversations which were due to cover discussions at any time during employment, not just termination, and about any issue, not just ending employment.”

Jew says the protected conversations initiative “appears to have been subsumed within the draft provisions for SAs. It appears that other than protecting settlement discussions and offers from being disclosed in unfair dismissal claims, the Government is not pursuing the concept of protected conversations any further.”

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