Settlement agreements without prejudice

This year many businesses may sadly have to start selecting some employees for redundancy. Alternatively, managers and HR departments may have to pick up those outstanding performance or conduct issues as furloughed employees return to work.

This article considers some of the issues for employers who want to offer settlement agreements as a way of ending the employment relationship. (Slightly different issues will arise when the employment has already ended, especially if litigation is already underway and are not covered in this article).

Why offer settlement agreements? 

Many businesses find that settlement agreements (previously called compromise agreements) are an indispensable tool in resolving actual or potential employee disputes on a ‘without prejudice’ basis.

Settlement agreements are a legally binding document which records the fact that the employee has agreed to accept an ‘offer’ from their employer in exchange for promising not to pursue legal claims against it. The offer often includes a termination date with pay in lieu of notice and a tax-free sum of as ‘compensation for loss of office’, although it does not have to.

Used effectively, settlement agreements make sound commercial sense, reduce management time and strife for all concerned and allow the parties to end the employment relationship on agreed terms.

How does the ‘without prejudice’ principle work?

When parties are engaged in a genuine attempt to settle an existing dispute the ‘without prejudice’ principle generally prevents statements made during negotiations from being put before the court or tribunal as evidence. In employment situations it is also recognised that the employer may want to propose the ending of employment on agreed terms before any legal dispute with the employee arises: for example, performance issues, organisational changes, or even a clash of personalities.

Rather than go through capability, redundancy or disciplinary proceedings, with its litigation and negative publicity risks, employers are able to hold ‘protected conversations’ with the intention of exiting the employee with some sort of financial settlement. These protected conversations are also covered by the ‘without prejudice’ principle even though a legal dispute has not yet started, Employment Rights Act 1996 S111A.

Mistakes that can forfeit ‘without prejudice’ protection

The ‘without prejudice’ protection afforded to both parties can be lost if they engage in what would be considered  by the courts to be improper behaviour. Examples of improper behaviour can be found in the Acas Code of Practice on Settlement Agreements Code of Practice 4 | Acas. The non-exhaustive list includes:

• All forms of harassment, bullying and intimidation, including through the use of offensive words or aggressive behaviour.

• Physical assault or the threat of physical assault and other criminal behaviour.
• All forms of victimisation.
• Discrimination because of age, sex, race, disability, sexual orientation, religion or belief, transgender, pregnancy and maternity and marriage or civil partnership.
• Putting undue pressure on a party. For instance:
• not giving reasonable time for consideration of a settlement offer;
• an employer saying before any form of disciplinary process has begun that if the offer is rejected then the employee will be dismissed; or
• An employee threatening to undermine an organisation’s public reputation if the organisation does not sign the agreement, unless the provisions of the Public Interest Disclosure Act 1998 apply

Beware of undue pressure

While well-meaning employers will not resort to aggressive tactics, we regularly see risky mistakes being made by under businesses under the category Acas refers to as ‘undue pressure’. Such mistakes are most commonly made by managers keen to get situations resolved immediately. (For example, the  Acas Code recommends that employees should be given 10 days to consider any offer) We have also seen overt discriminatory statements in  without prejudice correspondence, usually relating to disability or pregnancy.

Such mistakes are ‘gifts’ to the employee’s legal adviser who will exploit them to increase the financial package on offer.