What you need to know about changes to Compromise Agreements

Posted by Sarah Peacock on

What effect will the new pre-termination negotiations have?

As of 29 July 2013, pre-termination negotiations co-exist alongside the existing 'without prejudice' rule with one major difference.

In order to hold pre-termination negotiations with an employee there does not need to be an existing dispute. Although there are significant limitations to the protection they offer, they are likely to be seen as an attractive option where there are performance or conduct issues or a possible redundancy situation.

In essence either party will be able to speak about exit terms without the fear of these discussions becoming admissible in future Tribunal proceedings.

However, the employer must remember that these discussions only apply in cases of potential unfair dismissal (but not automatic unfair dismissal) and therefore if discrimination, breach of contract, or, for example, whistleblowing is a possible claim the discussion will not be protected.

Employers will also need to ensure that they do not engage in 'improper behaviour' or place 'undue pressure' on the employee as both of these could see the discussion losing its protection and becoming admissible. ACAS have published a new Code of Practice which should be followed in all cases where pre-termination negotiations or a settlement agreement is anticipated.

The Code makes it clear that the employer should be sure there is a basis for the discussion (e.g. poor performance or redundancy) and keep an internal note of the reasons for the discussion. This will go some way towards ensuring that employers will not be criticised for beginning pre-termination negotiations.

The Code also suggests that employers should allow employees to be accompanied to such discussions.

The Code states that although an initial offer can be made verbally the final agreement should be in writing and the employee should have at least 10 days to consider and seek advice on the terms of a settlement agreement.

What do the changes mean for compromise agreements generally?

Settlement Agreements replace Compromise Agreements from 29 July 2013. Although this is effectively a name change (all of the legal requirements for a Compromise Agreement will still have to be met and independent legal advice will still need to be sought), the process for offering compromise/settlement agreements generally should be reconsidered in the light of the ACAS Code of Practice.

Our view is that the Code should be followed, if possible, even if the employer is not seeking to rely on "pre-termination negotiations". Allowing the employee to be accompanied and to have 10 calendar days to consider the agreement are not legal requirements; but employers should view them as best practice and depart from them only where there is good reason to do so.

If you allow the employee to be accompanied (and bearing in mind the nature of the discussions, they may not want to be), you should ensure that the companion has paid time off to do this and is told that he/she must keep the negotiations confidential. Formal (e.g. disciplinary) processes are still required if a settlement agreement is refused.

ACAS has also now published "Settlement Agreements – A Guide" which has no formal legal status but provides some important pointers for employers. The ACAS guidance suggests that employers should consider whether the offer of a settlement agreement:

  • Is the best solution
  • Might appear to an employee to be "out of the blue" and how that might affect the employee – or the wider workforce – if a settlement agreement is not reached and
  • Might in itself constitute unlawful discrimination or victimisation.

The ACAS guidance also includes "optional template letters" and a "model settlement agreement" which, with notes, runs to some 25 pages.

Although the ACAS Code and Guide are very helpful, there remain a number of potential pitfalls when using pre-termination negotiations and settlement agreements. This is recognised by the guidance in particular which seeks to check that employers have truly understood the risks and even suggests – contrary to initial Government proposals – that they might want to seek legal advice.

This and the length of the Guide implicitly accepts that such processes are not as simple as the Government originally suggested. Nevertheless the new regime may, in the right circumstances, prove a useful tool for employers to broach a mutually agreed severance deal.

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Sarah specialises in all aspects of employment law, including health and safety, offering comprehensive and pragmatic commercial advice.

Sarah Peacock
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