Package of Reforms Plans for settlement agreements announced

Peninsula Team

October 07 2012

The Enterprise and Regulatory Reform Bill includes provision for the introduction of ‘settlement agreements’. The term ‘settlement agreement’ will be the term used to refer to what we currently know as ‘compromise agreements’. Compromise agreements are agreements whereby an employer pays an employee a sum of money to terminate employment, but the employee signs away his right to make a claim to tribunal in relation to an ongoing dispute with the employer.

It will be possible to use the new settlement agreements even where there is no existing dispute. A conversation during which a settlement agreement is discussed will be protected i.e. no part of the discussion can be used as evidence against the employer in a tribunal.

It is proposed that the statutory Code of Practice for the use of settlement agreements will set out the following principles for their use:

• Protection only applies to unfair dismissal cases;
• Either party may propose settlement but the reason for being offered the settlement should be clear;
• Settlement offers should be made in writing and set out clearly what is being offered e.g. sum of money, agreed reference etc, as well as what the next steps are if the individual chooses not to accept the offer;
• It would not be necessary for an employer to have followed any particular procedure prior to the offer but if an employer handles settlement in the wrong way (i.e. not as explained in the Code) there is a risk that this will give rise to a breach of the implied term of trust and confidence and allow the employee to resign and claim constructive dismissal;
• Where an individual refuses settlement the employer must go through a fair process before deciding whether to terminate the relationship;
• Individuals should be given a clear, reasonable period of time to respond and no undue pressure should be put on a party to accept the offer of settlement;

The Code should give specific examples of what may constitute ‘improper behaviour’ (a conversation will not be a protected conversation if the employer behaves ‘improperly’);

• As closely as possible, the approach should reflect current practice in ‘without prejudice’ negotiations;
• The employer should not make any discriminatory comments or act in a discriminatory way when making an offer of settlement.

The Government is also considering whether the current cap for an unfair dismissal compensatory award (£72,300) is set at an appropriate level to provide reasonable, but not excessive, compensation or whether the level of the cap should be decreased. It is considered that the current cap may lead to unrealistic perceptions among both employees and employers about the level of tribunal awards. It is proposed to cap the compensatory award at 12 months’ pay (which would be in conjunction with an overall cap of between £25,882 and £77,646).

It has also been officially confirmed that the proposal for ‘compensated no fault dismissals’, whereby a micro employer (less than 10 employees) would be able to terminate an employee’s employment purely by paying a sum of money, which the employee would not be able to contest, has been dropped and will not make it into law.

For any further clarification, please call our 24 Hour Advice Service on 0844 892 2772.

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