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Settling employment disputes

There are a number of situations where an employer will consider settling with an employee.

In exchange for some benefit, in most cases a cash settlement, the employee is asked to enter a binding agreement.  This might arise where there are shortcomings in the employee’s performance, organisational changes or simply a clash of personalities.  Capability, redundancy or disciplinary proceedings carry the risk of subsequent litigation and negative publicity; instead it is often seen as commercially beneficial to settle.

Sometimes employers may not want to settle such as to avoid setting a precedent. However, the alternatives which involve a longer and sometimes destructive process for the business might be even less attractive.

Before embarking on any discussion of settlement, an employer will need to assess their position.  One factor will be the length of the employee’s service.  With less than two years, they will not be able to claim unfair dismissal in most circumstances.  The length of notice required under the contract of employment will need to be taken into account.  The nature any grievance raised by an employee will also be important: for example, a complaint of discrimination does not require two years’ service to be heard by an Employment Tribunal.

A big problem for employers is that the conversation with the employee might suggest that dismissal is inevitable.  An employee might resign in response and claim that there is a constructive dismissal on the basis that all trust and confidence has broken down. They might also refer to the conversation in unfair dismissal proceedings if they are subsequently fired.

There are some important legal tools available to an employer to avoid the conversation being used against them in Court or Tribunal proceedings, though their limitations must be understood.

Under Section 111A (1) of the Employment Rights Act 1996, “protected conversations” allow negotiation to be initiated by the employer with a view to settling.  However, there are important exceptions.  An employee cannot be told to resign or be dismissed. Nor should they be told that they will be dismissed if they do not accept the settlement agreement. This might be considered to be “improper conduct” which removed the legal protection.

Another limitation with protected conversations is that the rule only relates to “ordinary” unfair dismissals.  Certain types of dismissal, such as because of whistle-blowing, will not be covered.  Also, if the employee raises an issue of unlawful discrimination, this will not be protected.

The alternative way to keep negotiations “off the record” is the “without prejudice” rule.  Settlement discussions will be “without prejudice” if they arise where there is a pre-existing dispute. A grievance in itself will not be sufficient (see the case of BNP Paribas v Mezzotero [2004] IRLR 508 (EAT)).  The question is whether in the course of negotiations the parties contemplated or might reasonably have contemplated litigation if they could not agree.  Also, without prejudice will not work where there has been misrepresentation, fraud, undue influence, perjury, blackmail or other “unambiguous in proprietary”.

What is clear from the complexity of the law around this issue is that employers need to be properly armed with legal advice.  There is the risk in many cases of turning a protected conversation into an unprotected one, for example, by stating that the alternative to the settlement would be dismissal.  Relying on the without prejudice provision too easily without considering whether there is really a dispute is risky.  However, the tools are available with careful expert guidance.

Once a settlement is agreed in principle the employer must ensure that a settlement is binding. It will not be binding unless certain legal conditions are met. One way is for an employee to sign a “settlement agreement”.  There are special requirements for this including that the employee has received independent legal advice and it must be in a special form. It is essential that such an agreement is professionally drafted otherwise it will be ineffective in preventing Tribunal claims.

An alternative method is available if the employee has contacted ACAS to commence a period of Early Conciliation, or where proceedings have already been issued in the Employment Tribunal. This is the use of an ACAS COT3 form, which is also legally binding.

The process of achieving a settlement can be a fraught one for employers.  There is a premium on early advice and ensuring that the documentation is professionally drafted.

To help clients navigate the process Thomas Mansfield has prepared a ‘settling employment disputes’ flowchart  identifying the key steps and decision points.