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Settlement Discussions - Brave New World?

Posted on 16 October 2013 by Maeve Vickery

Maeve Vickery, Employment Lawyer & Partner
The new legislative approach on settlement agreements and the supporting Acas Code of Practice and Guide came into effect on 29 July 2013. This article reviews the new settlement landscape and considers some of the implications and uncertainties for parties and practitioners. 

On 29 July 2013 the statutory landscape surrounding the admissibility of settlement discussions before a Court or Tribunal was radically altered by the implementation of section 111A(3) of the Employment Rights Act 1996 (ERA).  This new statutory provision sets out that offers of settlement in relation to unfair dismissal claims will be inadmissible in proceedings for unfair dismissal, except where the behaviour of a party is improper or connected with improper behaviour. 

This Article will consider the content of both the Acas Code of Practice on Settlement Agreements and the guidance, Settlement Agreements: A Guide before going on to consider some of the more difficult issues arising from the new section and its implementation.

The Code

The Acas Code of Practice on Settlement Agreements is a relatively short statutory Code, intended to assist parties and their representatives understand the implications of the new section. The Code is not at all prescriptive and gives a broad outline of the process, including a suggestion that employers provide reasons for the settlement proposal when the proposal is made and indicating that, as a general rule, a reasonable period for an employee to consider such a proposal will be 10 days.  In addition the Code deals particularly with the ambit of the section and the concept of “improper behaviour”, as well as how the new provision relates to the “without prejudice” rule.

Breach of the Code is not intended to give rise to any uplift in any award at the Tribunal, unlike breach of the Acas Code of Practice on Discipline and Grievance.

The Guide

The Guide, which does not have statutory effect, is far more extensive and includes advice on settlement agreements for both parties, along with checklists as to things which employers and employees may like to consider when contemplating offering or being offered a settlement agreement.  Also included are template letters for employers to propose a settlement agreement in situations where there has and has not been any previous performance management or disciplinary action.  The Guide also appends a model settlement agreement.  This is in effect a basic compromise agreement which is likely to require further provisions in anything but the most straightforward of circumstances.  These templates and the draft model agreement are not compulsory.

The Guide goes into considerably more depth than the Code on how settlement agreements might be used, the pros and cons and the process for making an offer, as well as on how to discuss and negotiate settlement offers. This aspect of the Guide is likely to be particularly useful to smaller business employers. These elements also go a considerable way to seek to address the concern expressed by both employers and employees in the government consultation on the new proposals, that they may result in poor management practice and, potentially, employers using this process to circumvent proper performance management.

The Guide also goes into some depth on the law and seeks to explain the interrelationship between this new statutory provision, the existing common law “without prejudice” rule and the concept of “improper behaviour” and “unambiguous impropriety” and the effect on admissibility.  This section of the guide is unavoidably technical and is likely to be quite difficult for lay people, if not their legal advisers, to follow.  

There are a number of useful case studies to illustrate what may or may not be considered “improper behaviour” which parties are likely to find useful.  In particular that where an employer tells an employee they are considering disciplinary action, including dismissal and canvasses a settlement proposal whilst at the same time making clear that a proper process would be followed before any decision to dismiss.  A further example draws the distinction between a conversation of this nature and one where the employee is told they are going to be dismissed and is then offered a settlement proposal, which also reflects what is set out in the Code.

The Guide deals with a number of other aspects including settlement agreements and collective redundancies, confidentiality provisions and what happens if an agreement is not reached or a settlement not honoured.

Unfair dismissal

The first point to note is that this new statutory protection only applies to unfair dismissal claims where the reason for the dismissal is not an automatically unfair reason and will therefore only be useful in the most straightforward of scenarios. The protection does not apply to any claims for discrimination or unfair dismissal arising from a protected disclosure, nor in cases of wrongful dismissal. This imposes a considerable limitation upon the benefit conferred by the statute and may lead to situations where evidence of offers made or discussions held between employers and employees prior to termination may be deemed inadmissible in relation to unfair dismissal proceedings but not in relation to other claims brought at the same time and based on the same facts.

How the Tribunal will proceed in these circumstances is not yet clear, with the prospect that this may lead to the split hearings to deal with claims based on the same facts where the protection does and does not apply. 

Relationship with the “without prejudice” rule

The new provision is in addition to the existing “without prejudice” rule and both legal frameworks will exist in tandem. The differences and similarities between the new section and its relationship with the “without prejudice” rule and their practical application have been the subject of much scrutiny, although the extent of the potential difficulties are only likely to become manifest when these issues are considered by the Tribunal.

One crucial distinction between the new statutory provision and the existing “without prejudice” rule is that the statutory provision does not require any “dispute” to acquire protection under the section.  This is intended to make holding these sorts of conversations easier for employers, without the risk of a claim for unfair constructive dismissal and quite possibly hurried settlement negotiations where such a claim would otherwise be likely to succeed if such discussions have been broached too early.  This should help avoid a scenario when employers are being advised to almost manufacture a dispute so as to fall within the without prejudice rule and also means that these sorts of issues can be discussed openly at a much earlier stage and, in most cases, benefit from the protection of the section.

As both legal frameworks will exist in tandem and the new section only applies to unfair dismissal proceedings, it is possible that it will be preferable to seek to argue “without prejudice” protection as this could cover all claims brought rather than be subject to this limitation.

There is another important difference in the effect and application of these two protections. “Without prejudice” protection does not apply where there has been “unambiguous impropriety”, as a matter of common law.  The new rule will not apply where there has been “improper behaviour” or behaviour connected with improper behaviour.  The potential consequences of this distinction are considered below.

Improper Behaviour

Section 111A(3) sets out that evidence of pre-termination negotiations is inadmissible in any proceedings in a complaint for unfair dismissal.  However, the section does not apply in relation to anything said or done which in the tribunal’s opinion was improper or was connected with improper behaviour.

The principal seeks to address such potential problems as the new statutory mechanism being used to disguise discriminatory conduct or undue pressure being applied to force parties to accept an offer. 

The Code sets out that whether or not the behaviour is “improper” will ultimately be for a Tribunal to decide.  The Code also provides a non-exhaustive list of examples of “improper” behaviour, including all forms of harassment, bullying and intimidation including the use of offensive words or aggressive behaviour, physical assault or threats of physical assault or other criminal behaviour and all forms of victimisation as well as discrimination on unlawful grounds. 

The Code also sets out that putting undue pressure on a party may also constitute “improper” behaviour and gives a number of examples of undue pressure, which could potentially constitute improper behaviour, which include;

  • failing to give a party reasonable time for consideration of the proposals – which should generally be a minimum period of 10 calendar days.
  • telling an employee that if the settlement proposal is rejected, they will be dismissed before any form of disciplinary process being commenced.

A distinction is drawn between this scenario  and setting out in a neutral manner the reasons that have lead to the proposed settlement, factually stating alternatives if an agreement is not reached including the possibility of commencing a disciplinary process is acceptable.

  • an employee threatening to undermine an organisation’s public reputation if the agreement is not signed in circumstances which do not involve a protected disclosure.

The Guide provides further information and case studies.

Whilst the Code and Guidance do provide a degree of clarity on the concept of “improper behaviour” this is a subject which will take a number of years to be tested in the courts which, in turn, is likely to lead to parties, particularly employers, being less than confident in relying on the new provision.

The concept of behaviour connected with “improper” behaviour is even more uncertain and is not covered in the Code or Guidance and will no doubt fuel further litigation as parties argue that the section should not apply.

The drafting of section 111A creates even more uncertainty as it sets out that where the tribunal does consider behaviour improper behaviour or connected with improper behaviour the rule on inadmissibility will apply only to the extent the tribunal “considers just”.  This is not explained at all and it is a matter of concern and speculation as to what the tribunals will make of this and how it may affect the application of the section.  This could lead to the tribunals carrying out a balancing exercise between the seriousness of the impropriety and the prejudicial effect on a party before determining admissibility.  The position on this aspect of the application of the new section is entirely unclear and will, inevitably, lead to satellite litigation to resolve how this part of the new section should be interpreted and applied.

Improper behaviour and unambiguous impropriety

Whilst “improper behaviour” will include “unambiguous impropriety”, as this is a higher test, there could be situations where there is improper behaviour, but this is not sufficiently improper so as to be considered unambiguous impropriety.

In such circumstances, the discussions would lose the protection of the statutory provision but, potentially, still have the protection of the “without prejudice” rule, as long as there was a pre-existing dispute.

If behaviour is regarded as constituting “unambiguous impropriety” this will lose protection under both the “without prejudice” rule (if there was a pre-existing dispute) and also under the new statutory regime.   

Conclusion

Whilst the Code and supporting Guide seek to address the complexities of having both  statutory and common law regimes in effect at the same time, the concepts involved, including those arising from the wording of the section, are not straightforward and will inevitably result in satellite litigation as the courts tackle the issues.

The lack of certainty and limited application of the new section may lead parties and practitioners to seek to rely on the established “without prejudice” rule which is likely to mean the utility of the new provisions are significantly reduced. 

Maeve Vickery
Head of Commercial and Employment, Pardoes Solicitors
Co-chair ELA Working Party on the Code and Guide
19.8.13

Posted in: Employment, Employment Law for Employees