The Employment Law Blog

Compromise Agreements v Settlement Agreements: what’s the difference?

There has been a lot of discussion over recent months about the Government’s proposal to replace the commonly used compromise agreement with a “settlement agreement”, but not everyone is clear about what the difference is and why the Government is proposing a change. So what is the difference?

Compromise Agreements
At present, where there is an existing dispute between an employer and an employee, as long as there is no fraud, undue influence or “unambiguous impropriety” (such as perjury or blackmail), they can enter into discussions on a “without prejudice” basis with a view to terminating the employment relationship. In these circumstances, such pre-termination discussions cannot be used as evidence in any subsequent employment tribunal proceedings.

If, as a result of such “without prejudice” discussions, an agreement is reached, the employee will enter into a compromise agreement where, in return for a compensatory payment, they agree to their employment terminating and compromise their employment rights. To be legally binding, there are certain conditions that need to be satisfied including the compromise agreement being in writing, citing which employment claims are being compromised, and the requirement for the employee to have received independent legal advice about the purpose and effect of the terms of the agreement.

Settlement Agreements
The Enterprise and Regulatory Reform Act introduces settlement agreements. Settlement agreements are, on the face of it, going to be the same as the existing compromise agreement, albeit with a new name; the same conditions need to be satisfied for them to be legally binding and they have the same effect of terminating the employment relationship whilst compromising an employees’ employment rights. So what’s new?

The “new” part is the introduction of “confidential” pre-termination discussions. As stated above, to benefit from the “without prejudice” protection so that such discussions cannot be used in any subsequent tribunal proceedings, there has to be an existing employment dispute before the discussions take place.

Having recognised that there are often occasions where either the employer or the employee want to enter into pre-termination discussions where there is no existing dispute, the Government has introduced the concept of “confidential” pre-termination discussions with the intention of encouraging employers and employees to enter into settlement agreements.

At the time of writing there is not a definite date for when the relevant provisions will come into effect but it is planned that it will happen this summer. When they do, employers and employees will be able to enter into pre-termination discussions without fear of such discussions being used as evidence in subsequent employment tribunal proceedings, in circumstances where there is not an existing dispute (or even where one or more of the parties is unaware of there being an employment problem).

However, it does not mean that employers have a carte blanch to enter into pre-termination discussions with employees whenever they feel like doing so. Instead, to obtain the new “confidential” protection, pre-termination discussions must only be used in circumstances involving a “straight forward” unfair dismissal claim. The “confidential” protection will therefore not arise where:

• there are grounds for an employee to pursue a claim for automatic unfair dismissal (e.g claims involving whistleblowing, union membership or asserting a statutory right), or where there are grounds to pursue a claim for discrimination, harassment, victimisation, breach of contract or wrongful dismissal; and/or

• there is any “improper behaviour”.

To assist employers with knowing when pre-termination discussions will benefit from the new “confidential” protection, ACAS has recently published the final draft Code of Practice on Settlement Agreements (“the Code”). This Code briefly explains what must be done (e.g what are legal requirements) for the protection to arise and what it suggests should be done so as to ensure best practice. At paragraphs 17 and 18, it provides guidance about what is likely to be considered to be “improper behaviour” and it specifies all types of discriminatory behaviour and “putting undue pressure on a party”.

The Government has made it clear that the new “confidential” and the existing “without prejudice” rules are to run concurrently.

The burning question then is whether the changes will achieve the Government’s aim of encouraging pre-termination discussions with a view to increasing the use of settlement agreements? I think not. My reason for this is the simple fact that whilst an employer may not have had any intention of engaging in any “improper behaviour” and may not enter into pre-termination discussions with any discriminatory intent, there can be no guarantee that an employee will not at allege that this has happened in which case it will be for the Tribunal judge to decide whether such pre-termination discussions benefit from the “confidential” protection.

So where does this leave employers? In my view, in no better position than is currently the case. If pre-termination discussions are entered into, even with the best intentions, in the absence of an existing dispute and the “without prejudice” protection, if a settlement agreement is not signed, an employer will continue to face the risk of such discussions being used against them in subsequent tribunal proceedings.

As soon as a date for the coming into force of these new provisions is announced, we will update you. In the meantime, if you are considering using a compromise agreement to terminate the employment relationship, contact one of our team on 0114 218 4000 who will be happy to advise you about how best to protect your position.

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