Following on from our first update on the introduction of Employment Tribunal Fees and other new Tribunal Rules from 29 July, our second update looks at the new rules regarding pre-termination discussions, the re-naming of Compromise Agreements as Settlement Agreements, and the new basis for calculating the cap on unfair dismissal compensation.
Pre-termination Discussions
It is well established that employers and employees can hold “without prejudice” conversations for the purpose of trying to settle a dispute, which must then remain “off the record” in any subsequent litigation proceedings if a settlement is not reached. However, a number of cases, including the BNP Paribas v Mezzotero case in 2004, have demonstrated the risks to employers of instigating a “without prejudice” discussion with an employee for the purpose of trying to engineer a severance deal in circumstances where the employee can argue that there was no pre-existing dispute.
Whilst without prejudice discussions are still widely used, there is therefore some risk that unless there is a clear dispute at the outset, such discussions might lead to the employee resigning and claiming constructive dismissal or seeking to rely on the conversation as evidence that the outcome of a subsequent redundancy, disciplinary or capability process was pre-meditated.
From 29 July 2013, employers and employees will be able to enter into confidential pre-termination negotiations which will be inadmissible in any ordinary unfair dismissal proceedings unless there has been “improper behaviour”. Negotiations mean any discussion or offer of proposed settlement terms. If it appears that there has been improper behaviour the negotiations will only be permissible to the extent considered just by the Court or Tribunal.
The new ACAS Code of Practice on Settlement Agreements contains a list of what can amount to improper behaviour, including all forms of harassment, bullying or intimidation; physical assault or the threat of physical assault or any other criminal behaviour. We can probably expect some interesting cases to unfold during the next few years regarding the type of verbal statements which might cross the line into harassment, bullying or intimidation.
The most striking aspect, and potential weakness, of this reform is that these “Pre-termination Discussions” will only remain inadmissible in ordinary unfair dismissal proceedings. They will continue to be admissible in, for example, automatically unfair dismissal cases (such as whistleblowing-related dismissals), breach of contract or discrimination cases.
The Government’s aim of this new legislation is to encourage early dispute resolution without resorting to litigation, thereby reducing the cost to both employers and employees and reducing uncertainty. However, given its limited application to ordinary unfair dismissal cases only, there must be a question mark over how effective it will be. There may even be a concern that it may encourage employees to bring more speculative claims in addition to unfair dismissal for the purpose of circumventing these rules.
In practical terms, employers would be well advised in most situations, but especially where they are any obvious concerns about claims such as discrimination or whistleblowing to ensure that any such conversations are also covered by the existing without prejudice rules rather than simply relying on the new pre-termination discussion rules. However, even then they must still keep in mind the need for there to be a pre-existing dispute.
To settle is not to compromise
Perhaps one of the more semantic (and arguably unnecessary) of the forthcoming changes is the re-naming of statutory Compromise Agreement as Settlement Agreements. The government’s rationale for making this change is that employers or employees might sometimes be dissuaded from agreeing to settle a dispute because they would not wish to be perceived as “compromising”.
This concern does not reflect our own experience as employment lawyers. We have advised on many compromise agreements during the last fifteen years (both employers and employees) but have on only one occasion encountered a query by a client (a non-UK headquartered employer with limited experience of UK employment law) as to whether the word “compromise” could be omitted from the compromise agreement. When we explained the reason why the term compromise agreement had to be used, they were perfectly happy to proceed.
In any event, the change is upon us and the legal position relating to the actual Settlement Agreement itself remains the same as for Compromise Agreements (including the requirement for independent legal advice), with the one slightly amended condition being that the agreement must state that “the conditions regulating Settlement Agreements have been satisfied”.
New Compensatory Award limits for Unfair Dismissal
At present the cap on the compensatory award is £74,200. This has previously been subject to annual review and increase in line with RPI.
For any dismissal which takes effect on or after 29 July 2013, the cap on the compensatory award will be the lower of £74,200 or 52 weeks’ pay. A week’s pay will be based on the Claimant’s annual gross salary prior to their dismissal and will not include pension contributions, benefits-in-kind or discretionary bonuses.
Future RPI-linked changes to the statutory cap will take effect on 6 April each year, not 1 February as has previously been the case. In addition, the government is not obliged to make an RPI-linked change where the new power to vary has been exercised in the previous 12 months. Since this amendment is in force from 29 July 2013, the next RPI-linked change to the unfair dismissal cap is therefore likely to be April 2015, not April 2014.
The Government’s aim in implementing the 52 weeks’ pay element of the cap is to manage employees’ expectations of likely compensation and encourage earlier resolution of disputes. It is also designed to provide employers with more certainty over the likely cost of any unfair dismissal award.
In practice it is fairly unusual for unfair dismissal compensation awards in excess of 12 months’ pay to be awarded by Employment Tribunals, so the change is unlikely to have a significant impact. However, it will at least lead to greater clarity in settlement negotiations regarding employees whose annual salary is less than £74,200. For more senior employees on higher salaries, it’s a moot point since the unfair dismissal cap remains the same and this is likely to constitute just one element of negotiations over their severance package in any event.
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