Using a settlement agreement to bring an employment relationship to an end, and achieve an amicable parting of the ways, can be very useful. But, to start the discussion, employers need to be able to speak off the record. There are ways that this can be done, but employers need to take care and be aware of a few limitations.
Below is an explanation of what settlement agreements are; when discussions are ‘off the record’ and the benefits of a settlement agreement and off-the-record conversations. We offer a word of caution and tips for employers on strengthening their bargaining position and a brief look at non-disclosure agreements after the #MeToo campaign and in the light of new legislation.
What is a settlement agreement?
A settlement agreement is a binding agreement to waive most contractual and statutory employment rights against the employer, usually in exchange for a severance payment and sometimes other benefits such as retention of property items and an agreed reference. They were previously called compromise agreements.
The agreement is only binding if certain statutory conditions are met. This legislation recognises the imbalance of bargaining power between employer and employee, and operates to protect the employee. Most significantly, unless a ‘COT3 agreement’ is reached through the conciliation services of Acas, the employee must receive independent advice from a lawyer or an appropriately qualified adviser about the terms and effect of the agreement.
Benefits of a settlement agreement
Dismissing an employee – and even negotiating an amical exit (such as for health reasons) – can be fraught with risk. Employers need to have a potentially fair reason for dismissal and must follow a fair dismissal process. If not, an employee with more than two years’ service could successfully bring a claim for unfair dismissal. Employees do not need two years’ service if they can establish that they were dismissed for one of a number of prohibited reasons, for example if the employer dismissed them because they made protected disclosures (whistle-blowing). Similar risks arise where an employee resigns and claims they have been constructively dismissed.
Using a settlement agreement can avoid the cost, delay, disruption and risk of instigating dismissal procedures. This allows the employer, with the employee’s consent, to end the relationship on agreed terms. Unless specific rights are carved out, a suitably worded settlement agreement should prevent the employee from bringing claims against the employer. Even after the employee has left the organisation, if the employer is concerned the former employee may bring a tribunal claim, they can initiate discussions about entering a settlement agreement or this may be suggested by the individual or their representative.
Bargaining position
Sometimes the individual will accept the severance terms offered initially, or they or their advisor will negotiate for more. The negotiations will often be based on what each party believes the individual’s potential claims would be worth if no agreement was reached and they went to tribunal. Employers with a strong open position tend to be in a stronger negotiating position than those who are trying to get out of a situation involving a clear breach of the employee’s rights, or where there is no alternative formal route which could lead to a fair dismissal. We can advise you on how to present a severance offer in the context of an open position and generally how to strengthen your business’s bargaining power.
Benefits of off-the-record discussions
Talking “off the record” allows for a frank discussion without the risk of it being used in evidence before a court or employment tribunal.
Otherwise, if the employer asks the employee whether they would be interested in an agreed exit, the employee could resign and claim constructive unfair dismissal. Alternatively, if the employee is dismissed further down the line, the employee could use this conversation in an unfair dismissal claim, for example to show that a performance management process was a sham and the employer wanted them out all along.
When are conversations “off the record”?
If there is an existing dispute with the employee, the ‘without prejudice’ rule will apply to communications genuinely aimed at resolving the dispute through settlement. Such conversations cannot be shared with a tribunal if the negotiations fall through. This would apply to all types of employment claims, but does not apply in exceptional circumstances such as where the communications involve fraud or blackmail.
If there is no existing dispute with the employee, and provided certain conditions are met, an employer can have what are known as “protected conversations” without the risk of the conversation coming back to haunt them. These are discussions held, before termination of employment, with a view to terminating employment on agreed terms. Sometimes a protected conversation is initiated by the employee. We can talk you through the timing and what you need to cover to make sure such discussions are protected as “off the record” pre-termination negotiations.
A word of warning; this protection only applies to unfair dismissal claims and discussions before the employee has left. If the employee has other potential claims, such as for discrimination, the conversation could form evidence in a tribunal. This creates an element of uncertainty as the extent of potential claims may not be known. The protection also does not apply if the discussions involve ‘improper behaviour’. The Acas Code of practice on settlement agreements gives examples of improper behaviour, such as saying that the employee will be dismissed if they reject the settlement offer.
Non-disclosure agreements
The #MeToo movement shone a light on the misuse of non-disclosure agreements (NDAs) to cover up harassment and discrimination by silencing victims. Settlement agreements usually include confidentiality clauses preventing both parties from discussing the agreement or its terms. Confidentiality clauses cannot, as a matter of law, prevent an individual from ‘whistleblowing’ or reporting anything to the police, and any wording suggesting this is void.
Various reports and consultations have taken place on NDAs since the #MeToo campaign. This has resulted in guidance on the use of NDAs from Acas and the Equality and Human Rights Commission, along with guidance to solicitors from their professional bodies.
In July 2019, the Government announced following a consultation it would bring in legislation to regulate the use of NDAs in employment contracts and settlements, including allowing an individual to disclose the settlement agreement to their doctor or other regulated health professional. These changes were to take place “when parliamentary time allows” but there has been no progress on this front.
In the Higher Education sector, the new Higher Education (Freedom of Speech) Act 2023 will prohibit universities and other higher education providers from using NDAs in relation to a ‘relevant complaint’. This means any complaint alleging sexual abuse, sexual harassment or sexual misconduct, or alleging any other bullying or harassment. Regulations will specify when this new legislation comes into force.
It is possible that future legislation will introduce similar restrictions in other sectors such as the NHS, although no timeframe for the introduction of further legislation has yet been given.
How we can help
There are ways to efficiently bring an employment relationship to an end and to keep risks to a minimum, but there are traps for the unwary. Talk to one of our employment lawyers as soon as possible, and we can ensure you avoid these traps.
Contact Patrick Glencross for further information on 01227 763939.
Please note: This article is for general information only and does not constitute legal or professional advice.
