Guide to pre-termination negotiations and settlement agreements

Introduction

In July 2013, the Employment Rights Act 1996 was amended to bring in the concept of pre-termination negotiations and to rename compromise agreements as “settlement agreements”. In support of these provisions, ACAS introduced a Code of Practice on Settlement Agreements and an accompanying booklet "Settlement Agreements: A Guide".

What are pre-termination negotiations? 

As previously, employers can still hold “without prejudice” conversations or correspondence with employees on agreeing terms of departure where there is an existing dispute.

However, the ability to hold a confidential conversation that cannot be referred to in tribunal proceedings was extended by the introduction of “pre-termination negotiations” which may be used even though there is no existing dispute. These pre-termination negotiations will allow the employer to have a discussion with an employee about the possibility of the employee leaving their employment with an agreed level of compensation, even if formal processes, such as a capability procedure, have not been started. If the employee refuses to take up the offer, or negotiations break down, the fact and content of those discussions cannot then be brought in evidence in a tribunal claim for ordinary unfair dismissal.

Are there any rules for settlement agreements?

For a settlement agreement to be a legally binding document which prevents an employee from making claims to a tribunal, the following must apply:

1. the agreement must be in writing and relate to a particular complaint or proceeding;
2. the employee must receive independent advice from a qualified lawyer, certified union official or authorised advice centre worker;
3. the advisor must be covered by a current contract of insurance or professional indemnity advice and be named in the agreement;
4. the agreement must state which statutory provisions are covered (the use of “all claims” is not enough); and
5. the statement must state that the applicable statutory conditions regulating the settlement agreement are satisfied.

Remember, the process is voluntary for both parties and proposals can be started or rejected by either party or amended by a process of negotiation.

What is to stop unscrupulous managers from just using pre-termination negotiations as a neat way to side step using proper procedures?

The protection of confidentiality may be withdrawn where conversations take place which a tribunal would deem to be improper, although “improper” is not specifically defined in the legislation. However, helpfully, the ACAS Code of Practice on Settlement Agreements together with non-statutory guidance sheds some light on what could be considered improper. ACAS refer to examples of undue pressure being placed on employees or evidence of coercion such as not allowing a proper time to consider a settlement offer (see below) or threatening dismissal if the employee rejects the offer. Of course the 'unambiguous impropriety' of behaviour such as discrimination, harassment, victimisation, criminal activity or blackmail (the test for lifting the veil on a “without prejudice” communication) will still apply.

Ultimately, where there is a complaint or dispute about the nature of pre-termination negotiations, a tribunal will decide if improper behaviour has occurred and whether it would be just to admit the content of those discussions as evidence.

How long should I give an employee to consider accepting a settlement agreement?

ACAS give a general rule that 10 calendar days would be the minimum reasonable time to allow consideration of a proposed settlement agreement, depending on the circumstances. This would include consideration of the written terms of the agreement and receipt of independent advice.

Pre-termination negotiations in practice

Employers are advised to encourage their managers to continue to use normal procedures where appropriate to deal with employee shortcomings or matters of potential dispute. However, if a negotiated parting of the ways appears to be a realistic way of resolving an issue, then guidance should be given on who is authorised to conduct a pre-termination discussion and under what circumstances. 

Ensure that those responsible for conducting the discussions are aware of the ACAS Code of Practice and its associated documentation as these are key to ensuring the process used is within the scope of the provisions. We recommend restricting the power to use pre-termination negotiations to a fairly tight group of senior managers, or making clear that advice and authorisation should be sought by HR or from a designated senior individual before discussions commence. 

If you require settlement agreement documentation, please contact your HR Rely advisor as the facts and circumstance of each case often vary considerably and it will very rarely be sufficient to complete a standard template document. View the example Pre-Termination Negotiation Letter as well as the example Settlement Agreement Questionnaire.

What happens if the negotiations break down?

If the issue with the employee is one that will fall under an existing procedure such as capability or conduct, then the employer should follow their normal procedures or else risk an unfair dismissal. If the issue is not so clear cut, for example, a proposed re-structure or a clash of personalities, it may have to be dealt with in a different way. Seek advice from your HR Rely advisor.

Employers should be careful not to say to employees that their only choice is to sign an agreement or be dismissed. However, it is acceptable to factually state that dismissal may be an alternative outcome if no agreement is reached. The employee should be advised that, if the agreement is not accepted, the employee will consider pursuing the matter under another appropriate internal process, such as disciplinary proceedings or a performance management process.

Are there any exemptions?

Issues of discrimination, automatic unfair dismissal and breach of contract are not covered by the “pre-termination negotiation” exemption. This means that if an employee brings a claim for say, age discrimination, they can refer to the pre-termination negotiation when at the Tribunal where permitted to do so by the Tribunal.

The exemption of breach of contract means that it can be very tricky to deal with constructive dismissal claims under the rules, as these rely on the Claimant proving a fundamental breach of contract, which could potentially be a breach of trust and confidence in being asked to consider leaving.

Any conversations which have a taint of discrimination will usually be excluded, but how should an employer deal with complaints of discrimination which arise during the pre termination negotiation conversations? The best route here would be to investigate the matter as a grievance using the organisation’s normal procedures. If the findings are such that no taint of discrimination is found, then discussions could possibly be re-opened, with the agreement of the employee, using a different negotiator than before.

In any event, it is recommended by ACAS that the offer to be accompanied (by a trade union official or work colleague) extends to these negotiations as it would in any formal proceedings.

Are “protected conversations” the same as "pre-termination negotiations"?

The government originally proposed to introduce the very broad concept of "protected conversations" to enable employers to have open and frank discussions with employees about issues such as poor performance or retirement plans, even where termination of employment was not envisaged. Following consultation with a wide range of stakeholders, this concept was dropped and the only type of conversation that has protection is the 'pre-termination negotiation', where termination of employment is specifically envisaged.

While, technically, the term 'pre-termination negotiation' is correct, over time, the terms 'pre-termination negotiation' and 'protected conversation' have come to be used interchangeably.