Settlement Agreements and Pre-termination Negotiations

It is not uncommon for employers to enter into discussions with employees during which they suggest that the employment should end on settlement terms, for example in order to avoid a possibly protracted disciplinary or performance management process.

Many such discussions are labelled "without prejudice", but are not truly without prejudice in nature. Without prejudice communications are not admissible in evidence before a court or employment tribunal other than in limited circumstances, including where there has been “unambiguous impropriety” (see below). However, a communication will only actually be without prejudice if it is in connection with a genuine attempt to settle a pre-existing dispute. In the circumstances referred to above, there will often not be a dispute at the time the employer suggests that the employment should end – but that discussion itself can sometimes trigger a dispute and, as the law stands, employees are unrestricted in being able to refer to that discussion in evidence.

The Government is of the view that this discourages employers from offering settlement terms in order to end problem employment relationships early. In an attempt to rectify this, any pre-termination offers made or discussions held on or after 29 July are to be prevented from being referred to in evidence in ordinary unfair dismissal cases, unless there is “improper behaviour”.

At the same time compromise agreements – which are the only means of compromising possible employment tribunal claims other than by entering into an Acas conciliated agreement – are to be re-named "settlement agreements" in all relevant pieces of employment legislation.

There is to be an Acas statutory code of practice on how pre-termination negotiations will operate in practice (“the Code”):

Improper behaviour

Where, in the view of an employment tribunal, anything said or done is improper or connected with improper behaviour, the tribunal will treat that evidence as inadmissible to the extent that it considers it just to do so.

In connection with the common law without prejudice rule, the threshold for “unambiguous impropriety” is high, covering matters such as unlawful discrimination, blackmail or criminal activity. However, the Code stipulates that "improper behaviour" will be wider than "unambiguous impropriety" and includes the following non-exhaustive examples:-

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 them reasonable time for consideration (see below);

  • An employer saying before any form of disciplinary process has begun that if a settlement proposal is rejected then the employee will be dismissed;

  • An employee threatening to undermine an organisation’s public reputation if the organisation does not sign the agreement, unless the whistleblowing legislation applies.
The Code also makes it clear that a party is not intended to be prevented, for instance, from setting out in a neutral manner the reasons for the proposed settlement agreement, or factually stating the likely alternatives if an agreement is not reached, including the possibility of starting a disciplinary process.

Reasonable time for consideration

The Code requires that employees should be given a reasonable period of time to consider proposed settlement agreements. What constitutes a reasonable period of time will depend on the circumstances of the case but, as a general rule, a minimum period of 10 days should be allowed to consider the agreement and to receive independent advice, unless the parties agree otherwise.

Right to be accompanied

The Code states that whilst not a legal requirement, employers should allow employees to be accompanied at any meetings in connection with settlement by a colleague or trade union official / representative, as it is good practice and may help to progress discussions.

Inadmissibility in ordinary unfair dismissal proceedings

The new law will only prevent what is stated in the settlement offer, or during discussions about it, from being admissible in ordinary unfair dismissal proceedings. This means that the fact and content of the offer or discussions may be referred to in any other case, including:

  • Automatically unfair dismissal (such as under the whistleblowing legislation or relating to asserting a statutory right).

  • Discrimination.

  • Breach of contract (including wrongful dismissal, i.e. dismissal in breach of contract).

One of the apparent concerns of some employers that was highlighted by the Government when proposing the new rules was that it is possible for discussions in which the employer suggests that the employment should end to constitute a breach of trust and confidence – or at least that employees may allege that this is the case.  The new rules will not therefore actually address this concern.

Will anything actually change?

The reality has always been, and will remain, that it is unrealistic for any employer to ring-fence what is proposed in a settlement agreement or said in a related meeting from its consequences. To invite an employee to leave on terms is bound to have consequences for employment relations.

However, it has also always been, and will remain, the case that, handled in the right way, offering or discussing severance terms will not constitute a breach of contract or contribute to a finding of unfair dismissal – regardless of whether the offer or discussions are referred to in evidence. 

In our view, the key to offering an employee severance terms is to identify a commercially practical and acceptable strategy for the ‘Plan A’ – encouraging the employee to take the settlement and leave; and also the ‘Plan B’ – what to do if the employee does not accept the offer.

Sometimes Plan A will involve commencing a disciplinary or performance management process at the same time as making a settlement offer, or at least asserting that this will be done in the absence of settlement.  Sometimes Plan B will involve actually implementing such a process, while on other occasions it will involve deliberately dismissing the employee unfairly and/or in breach of contract and seeing what settlement can be reached thereafter, or facing an award by a court or tribunal.  The pending reduction in the cap on unfair dismissal compensation to an amount equal to a year’s gross pay will make this a more attractive option than it was before in many cases.

Under the new rules, it will not be compulsory for settlement offers to be put in writing – although the agreement itself must be.  The Code states that it might be useful to put offers in writing.  In our view, it is actually very important that this is done for several reasons, including:

  • Taking care to commit the proposals to writing should be part of the process of ensuring that they are properly thought out, and that appropriate legal advice is obtained in respect of them.

  • Then restricting what is put to the employee verbally to what is contained in the written communication will safeguard against the employer straying “off-script” and potentially prejudicing its position.

  • The employee – who will be often shocked and/or angry, and might not take in everything that is said – will have an accurate record of what has been put to him or her to take away and put to their solicitor.

  • In the event that what has been put to the employee becomes the subject of an internal grievance or legal proceedings (perhaps with regard to whether there has been improper behaviour), the written communication will be important evidence.  This should help the employer, if it has acted sensibly.

Template letters, which were subject to considerable criticism during the consultation, were originally contained in the draft Code, but have been removed. Templates will instead be included in the non-statutory guidance, which is yet to be published. It remains to be seen what improvements, if any, there will be on those that were contained in the draft Code, and otherwise the extent that they are fit for purpose.  Draft guidance which accompanied the original templates encouraged employers to obtain legal advice in respect of them.  Presumably, therefore, the non-statutory guidance will do likewise when it is published.  In any event, it would be prudent to obtain advice from employment law specialists.

What is possible is that the new rules and the attendant publicity and, to an extent, uncertainty surrounding them – including with regard to what will constitute “improper behaviour” – might give rise to more scope for wrangling between employers and employees, rather than less.

For advice relating to the termination of employment, or other employment matters, I can be contacted on 01952 211010; email: or my colleague Will Morse on telephone 01432 377152; email