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Following changes made by the Enterprise and Regulatory Reform Act 2013, compromise agreements were renamed ‘settlement agreements’ and new provisions (Section 111A) were inserted into the Employment Rights Act 1996 (ERA) making settlement agreement discussions inadmissible as evidence in ordinary unfair dismissal cases so that offers to end the employment relationship on agreed terms can now be made on a confidential basis.
Employee safeguards that applied to compromise agreements also apply to settlement agreements. For a settlement agreement to be legally binding, the following conditions must be met:
However, whereas compromise agreements could only be used to resolve ongoing workplace issues, as a mechanism for preventing possible future complaints to the ET, settlement agreements can be used to end an employment relationship on agreed terms.
The communications that take place in order to reach a settlement agreement that relates to an existing employment dispute will normally be on a ‘without prejudice’ basis – i.e. they will be inadmissible as evidence before the court or ET – provided they constitute a genuine attempt to resolve the dispute and there is no fraud, undue influence or other ‘unambiguous impropriety’. Prior to the introduction of Section 111A of the ERA, this ‘without prejudice’ confidentiality did not apply where there was no existing dispute between the parties. The change was made in order to allow greater flexibility in the use of confidential discussions as a means of ending the employment relationship. Section 111A, which runs alongside the ‘without prejudice’ principle, provides that even where no employment dispute exists, the parties may still offer and discuss a settlement agreement in the knowledge that their conversations cannot be used as evidence in any subsequent unfair dismissal claim. However, the protection will not apply where there is some ‘improper behaviour’ in relation to the settlement agreement discussions or the offer, unless the ET decides that it would be just to exclude the evidence.
The Advisory, Conciliation and Arbitration Service (Acas) produced a statutory Code of Practice, ‘Settlement Agreements under Section 111A of the Employment Rights Act 1996’, which focuses on the confidentiality aspect of Section 111A of the ERA. This sets out the legal requirements with regard to such agreements and also provides general guidance on best practice, such as a recommendation that employers allow employees to be accompanied during the negotiations by a work colleague, trade union official or trade union representative, together with some examples of what would constitute ‘improper behaviour’ in this context.
In addition, Acas published a booklet entitled ‘Settlement Agreements: A Guide’, which contains non-statutory guidance (including template letters) designed to help employers and employees understand what settlement agreements are, what their effect is, when they might best be used and how they can be negotiated.
Whether or not these changes will have the desired effect of enabling employers and employees to have honest and open discussions about ending the employment relationship remains to be seen. If a settlement agreement cannot be reached, damage will have been done to the employment relationship, which might make moving forward difficult for both parties. Employers will have to handle the process carefully to avoid being faced with allegations of improper, or possibly discriminatory, behaviour by an employee who wishes to rely on the communications as evidence in an ET claim.
When Are Settlement Discussions Protected?
A recent case (Faithorn Farrell Timms LLP v Bailey) looked at when settlement discussions are protected and illustrates how the pre-termination and the without prejudice rules can run alongside each other. The case was the first appellate judgment on the inadmissibility conferred by Section 111A of the ERA.
The case concerned the admissibility of evidence in a secretary's claims against her employer. Ms Bailey had worked part-time as an office secretary for Faithorn Farrell Timms plc, a firm of surveyors, from March 2009 until she resigned after part-time working was no longer an option for her and discussions she had initiated with a view to agreeing terms on which to end her employment had broken down. Whatever the initial intention, it was common ground that by 7 January 2015 the parties were in dispute. Whilst earlier correspondence from Ms Bailey's solicitor setting out her position had been marked 'without prejudice', her employer's response was not so marked. During the latter part of January, Ms Bailey raised an internal grievance, but this was rejected. Her grievance letter had made it clear she was openly relying on matters set out in the earlier correspondence. Faithorn Farrell Timms did not question Ms Bailey's having referred to the correspondence between them on an open basis and had itself referred to it in its report on her grievance.
Ms Bailey resigned on 26 February 2015 and brought claims of constructive dismissal and indirect sex discrimination arising, in part, from her employer's conduct towards her during the negotiations. In her claim form, she made reference to the content of letters exchanged between her and her employer and hoped to rely on this as evidence in both claims. Faithorn Farrell Timms denied the claims but did not object at this stage to the open reference to the various documents mentioned by Ms Bailey and cited the same material in support of its own case.
In deciding on the admissibility of the documentation, the Employment Appeal Tribunal noted that Section 111A has to be viewed independently of common law without prejudice principles. It proceeded on the basis that there was no dispute prior to 7 January, so issues of admissibility prior to that date could only be considered under Section 111A, not as instances of without prejudice privilege. Key findings were:
The matter was referred back to the ET as it had failed to consider Ms Bailey's claim that there was improper behaviour on the part of her employer that would allow the documentation on which she wished to rely to be used as evidence during the unfair dismissal proceedings.
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