Settlement Agreements – a significant change in the law or Compromise Agreements in a new guise?

Thursday, October 25th, 2012

The Employment Team will be taking a more in-depth look at the proposed changes to employment law as a series of blogs. This week, Employment Law solicitor Amy Walker, looks at the Government’s proposals in respect of settlement agreements and asks whether they constitute a real change to the law or merely a politically motivated rebranding exercise.
On 14 September 2012, Vince Cable announced a series of changes to employment law designed to promote early settlement of employment disputes which includes the introduction of settlement agreements. On 14 September, a consultation regarding the proposals was launched by the Department for Business Innovation & Skills entitled “Ending the Employment Relationship” . The term “settlement agreement” will come into force as part of the Enterprise and Regulatory Reform Bill currently making its way through Parliament but the consultation will deal with the guidance that will dictate how the agreements are actually used in practice. This article will attempt to deconstruct what the proposals actually mean in real terms for both employees and employers.
Currently, claims may be settled by use of a compromise agreement. Generally, an employer pays a sum of money to an employee and in return the employee agrees to “compromise” any claims they may have against the employer. The employee gets paid a fixed amount quickly and the employer gets the certainty of knowing that no claim will be made and that the matter is at an end. This certainty is assured by the fact that the employer has to receive legal advice before the compromise agreement is signed hence the employer can be confident that they will avoid a situation where an employee claims “I did not understand what I was signing, I did not realise I could bring a further claim etc”. In our experience compromise agreements have proved successful and are widely utilised across many sectors of industry.

Rationale for change
So what then is the rationale for introducing settlement agreements? Do they in fact constitute a real change in employment law and crucially how will this affect both employers and employees?
Well, the stated rationale (as set out in the consultation paper) is that the protections offered by compromise agreements are “incomplete” and as such the Enterprise and Regulatory Reform Bill will introduce measures to “to promote the use of compromise agreements, including renaming them as settlement agreement s”.

According to the consultation paper, the term settlement agreement is a more accurate representation of what the agreement encompasses and is also a more widely understood term due to its use in contract claims. The name change will apparently also “help to avoid any party refusing to sign an agreement on the grounds that they do not want to be seen as ‘compromising’.” Putting aside the fact that the very essence of these agreements is a compromise by both parties (as explained above), it is suggested that the above scenario is not so common in practice as to necessitate a change in the law. In any event, if this issue were to arise then the legal advisor (necessitated by the terms of the compromise agreement) would surely be able to clarify the position to the employee. It is also worth mentioning that if, as suggested in the consultation paper but not conceded here, “compromise” has negative connotations for some people (presumably for implying perhaps a lack of complete satisfaction with the outcome) then surely the notion of “settling” will also be problematic?

Settlement Agreements and Unfair Dismissal

What are the Government actually proposing in terms of substantive change? How are the “incomplete protections” going to be strengthened? On the evidence of the consultation paper, it is not the agreements themselves which will change but rather the setting in which they are made and the status that they carry. There is a concern that currently the actual offer of a settlement is not “without prejudice” and as such can be used as evidence if the case comes to Tribunal. Employers have voiced concerns that making an offer in itself could be used as evidence that someone had been unfairly dismissed (as it shows that the employer was trying to dismiss before going through the correct procedure) and this has therefore prevented them from making offers at an early stage. Similarly there is a concern that an offer made at an early juncture could spark a constructive dismissal claim. The remedy for this is a change to the unfair dismissal law so that offers of settlement are not admissible in unfair dismissal cases. This will be implemented through the Enterprise and Regulatory Reform Bill (currently making its way through Parliament) which will amend the relevant sections of the Employment Rights Act 1996.
Statutory Code of Practice
The amendment to the ERA will be accompanied by a Statutory Code of Practice and it is here that significant changes might actually be made manifest. It is proposed that the Code will set out guidelines for the use of settlement agreements and include standard letters and a model settlement agreement .
The justification for this is that:
“By creating templates, with supporting guidance, that can be used with minimal tailoring, we believe that employer and employee time and costs will be reduced as they will require less legal advice, if any at all, in creating and explaining the settlement agreement process and content. In this way, they offer a faster track to settlement.”

It is argued that the above justification carries with it a myriad of potential problems. For example, if complex contractual documents (which settlement/compromise agreements undoubtedly are) are entered into on a pro forma basis without even a modicum of legal advice surely the potential for legal claims is increased with employees arguing that they were unaware of the connotations of the agreement they signed? It would seem that for now the Government understands the force of this argument as the proposed model documentation referred to earlier makes clear that legal advice is still compulsory when entering into a Settlement Agreement (as set out in Employment Rights Act 1996 203 (3)). However, given the intent stated in the consultation as quoted above it is definitely an area to keep an eye on.

Conclusion
Settlement agreements are essentially compromise agreements and the change of name is an unnecessary and unwelcome distraction from the real substantive changes that are already being enacted. In particular, settlement agreements are already well on the way to becoming law and in that regard the effectiveness of the current consultation would have to be questioned. It is the change to the law surrounding unfair dismissal that will have more of an impact on both employers and employees regulating as it does the actual making of settlement offers. The aim is to make the process of settlement quicker and more effective but whether this will be achieved will only become apparent once the Enterprise and Regulatory Reform Bill has been passed into law. This Bill is currently at the report stage and the next article in this series will look more closely at the Bill and analyse its projected impact on Employment Law.

If you have any employment Law queries please do contact one of our team here at Hanne & Co on info@hanne.co.uk