Government promotes wider use of ‘settlement agreements’

As part of its review of employment law in the UK, in June 2012 the coalition government announced legislative plans to encourage the use of ‘settlement agreements’ to terminate employment relationships without recourse to an employment tribunal. These plans are set out in a new bill currently being debated in the UK Parliament. The coalition government is also considering introducing a compensated no-fault dismissal scheme for businesses with fewer than 10 employees.

Employment law reform

Since taking office in May 2010 (UK1005019I) the Conservative–Liberal Democrat coalition government has been reviewing the legislation on workplace dispute resolution, employment tribunals and dismissal. It argues that current rules make it excessively difficult and costly to resolve disputes and dismiss employees, and may deter employers from recruiting people.

The main outcome so far of this review is that the qualifying period of employment for entitlement to claim unfair dismissal was extended in April 2012 from one to two years (UK1112039I). Some aspects of employment tribunal procedures have also been amended.

In May 2012, the government published an Enterprise and Regulatory Reform Bill which includes further reform of employment tribunals. Notably, it would require claimants, before lodging a tribunal claim, to notify the Advisory, Conciliation and Arbitration Service (Acas) so that it can seek a settlement through conciliation. In addition, a new ‘rapid resolution’ scheme would be used for less complex tribunal cases.

Plans for settlement agreements

‘Compromise agreements’ are an existing means of terminating employment contracts by mutual consent, with the employee receiving a payment in return for waiving rights to bring (or continue) an employment tribunal claim against the employer. Such agreements are subject to statutory conditions. For example, they can relate only to a specific claim and the employee must receive independent advice before signing. The use of compromise agreements has been increasing in recent years, especially for senior staff and among large employers.

The initial version of the Enterprise and Regulatory Reform Bill changes references to compromise agreements in existing legislation to ‘settlement agreements’ so as to ‘improve understanding of their purpose’. On 11 June 2012, at the start of the Bill’s second reading stage, the government announced plans for further, more substantive changes. Employers would be able to offer settlement agreements before a formal dispute arises and be legally protected from this offer, or discussions about it, being used as evidence in an employment tribunal unfair dismissal case. However, employees could reject the offer and proceed to a tribunal.

As reported in a press release from the Department for Business, Innovation and Skills (BIS), Employment Minister, Norman Lamb, said in a speech during the second reading in the House of Commons that:

The Government wants to encourage greater use of settlement agreements and make it easier and quicker for employers – including SMEs [small and medium size enterprises] – and employees to end the employment relationship by mutual agreement in a way that protects workers’ rights but helps businesses remain flexible.

During the same debate, the Business Secretary, Vince Cable, described strengthened settlement agreements as ‘smart, fair and pro-business reforms which deliver results for employees and employers’.

The government plans to consult soon on guidance for using settlement agreements, including model letters and templates.

Compensated no-fault dismissal

In March 2012, the government called for evidence on the idea of introducing a ‘compensated no-fault dismissal’ scheme for businesses with fewer than 10 employees. This would allow an employer to dismiss an employee without giving a reason, provided a set amount of compensation was paid. Such dismissals could not be deemed unfair unless unlawful discrimination or other automatically unfair grounds were involved. This concept was floated in the Beecroft report on employment law (185Kb PDF), commissioned by the government and published in May 2012 (having been leaked in late 2011, UK1111019I). The issue has proved highly controversial within the governing coalition, dividing the two parties with the Liberal Democrats strongly opposed. The Liberal Democrat Business Secretary, who has responsibility for employment law, has dismissed the idea as ‘the wrong approach’.

The evidence-gathering exercise ended in early June and we await the government’s next steps. Although the government has said that the two issues are separate, commentators have suggested that the introduction of strengthened settlement agreements may be accompanied by the shelving of the compensated no-fault dismissal idea.

Social partner views

The employers’ organisation, the Confederation of British Industry (CBI) welcomed the settlement agreement plans. Its Director for Employment and Skills, Neil Carberry, said in a press release issued on the same day as the debate on the second reading in the House of Commons:

Simplified settlement agreements will give firms the confidence to have a frank conversation about ending employment on fair terms, without the fear of a drawn-out and costly tribunal claim. The CBI has long taken the view that simpler and more legally certain settlement agreements would be more effective for employees and businesses, especially smaller firms.

Trade unions oppose the proposals. For example, Paul Kenny, General Secretary of the GMB general union, described the plan as ‘no-fault dismissal by another name’, while Mike Clancy, the General Secretary Designate of the professional staff union, Prospect, commented in a press release dated 11 June 2012:

While less harsh than Beecroft’s proposals for ‘compensated no-fault dismissal’, Cable’s proposal has the same purpose – to make it harder for employees to take a case to an employment tribunal if they feel they have been unfairly dismissed.

Mark Carley, IRRU/SPIRE Associates

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