Settlement Agreement: Why it’s Good to Talk!

While it is now anticipated that employees will be able to make complaints of harassment or discrimination even after they have entered into a settlement agreement once the Employment Law Bill come into force, developments in the case law in England and Wales over the last year continue to illuminate, by contrast, the established legal protections of non-disclosure in later proceedings of things said or done in pre-termination discussions.

There are two legal rules governing whether employees may adduce evidence around pre-termination offers in subsequent employment tribunal proceedings:

The “without prejudice” principle: which has the effect of rendering inadmissible any exploratory conversation with an employee around terms of settlement where the parties are in an actual or contemplated legal dispute.

The “protected conversation”, introduced as section 111A into the Employment Rights Act 1996 (ERA 1996): which covers offers made or discussions held with a view to termination of employment on agreed terms, but which is limited to complaints of “ordinary” unfair dismissal. Complaints of unlawful discrimination, for instance, are excluded from its remit. A caveat to protection operates where anything said or done was improper (or connected with improper behaviour) in which case the protection from admissibility will only operate where the tribunal considers it “just”.

A curious feature of the interoperability of these rules is that in the same proceedings pre-termination offers and negotiations may be inadmissible for an ordinary unfair dismissal complaint but admissible for other complaints. For that reason employers will often refer to both rules being engaged when approaching employees with an offer of settlement.

While not formally binding on employment tribunals, the tribunal is required to take into account the ACAS Code of Practice on Settlement Agreements, which sets out principles of good practice, with examples of improper behaviour that include putting a party under “undue pressure” by (i) not giving a reasonable period of time to consider the proposed terms of a settlement agreement and to receive independent advice, and (ii) an employer saying before any form of disciplinary process has begun that if a settlement proposal is rejected then the employee will be dismissed.

What constitutes a reasonable period of time will depend on the circumstances of the case. As a general rule, the Code recommends a minimum period of 10 calendar days be allowed for the employee to consider the proposed formal written terms of a settlement agreement and to receive independent advice, unless the parties agree otherwise.

In the case of Gallagher v McKinnon’s Auto and Tyres Limited, the Employment Appeal Tribunal (EAT) considered the employee’s appeal against the decision of the Employment Tribunal (ET) that nothing improper had taken place. The EAT’s reasons for dismissing the appeal shed light on how the parties to settlement may approach the timing of offers and how to frame them in such a way that retains their protected status. 

The employer had invited its employee to a return to work meeting after a period of sickness but, to the employee’s surprise, had then taken the opportunity to offer an exit package, which if rejected would be followed redundancy in that his job could be covered by those making the offer, and had given him 48 hours to consider it.

There was at that point no dispute between the parties and so in reality the without prejudice principle had no application. The employee did not accept the offer and was subsequently dismissed on grounds of redundancy. He argued that he was put under undue pressure to accept the offer, which was improper and so entitled him to rely on the caveat in s. 111A, ERA 1996 to adduce in evidence what was said and done by the employer in support of his later claim for unfair dismissal.

There is no requirement in the ACAS Code for employers to give notice of a meeting at which an exit offer or related pre-termination negotiation will be engaged in. Furthermore, the Code refers to 10 calendar days only in relation to formal written terms – where an offer is initially conveyed in headline terms a reasonable period of time for consideration depends on the circumstances. In most cases that period will be much shorter.

While the ET had found the surprise offer to be unfair to the claimant in the circumstances of a return to work meeting, ACAS’s guidance on the Code recognises that the ostensible reason for the meeting may lead to discussion about severance and terms of settlement. In any event, even if the employee was invited to the meeting on a pretext that it was a return to work meeting, the real issue was not one of fairness in all the circumstances but of impropriety, and that was not made out on the evidence. 

The Code contemplates the effect of undue pressure in the context of a disciplinary process, rather than a redundancy or other process.

In this case the ET made a distinction between the employer’s view that his role was redundant, and separately, whether that definitively meant that he would be dismissed if he rejected the proposal. On the evidence, the ET found that the employer had not said anything that indicated a firm conclusion had been reached that dismissal would follow if he rejected the offer; redundancy of his role did not equate to his dismissal and he could have been redeployed elsewhere.

The case illustrates the flexibility employers have in making pre-termination offers of settlement both as to the periods in which the offer shall remain on the table and the potential consequences of rejecting the offer. However, in all cases, but especially in those where disciplinary action is contemplated, employers should be careful to avoid saying anything which could be reasonably construed as amounting to closed mind that dismissal would follow if settlement was not reached.     

There is a simpler principle of more universal application which has much to recommend it when approached in good faith – sometimes, it’s good to talk.

If you would like to discuss how to approach a pre-termination offer or have a settlement agreement yourself, please get in touch.

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