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Response to the Ending the Employment Relationship consultation

By: Amanda Steadman

Submitted by Firm:
Addleshaw Goddard
Firm Contacts:
Michael Leftley, Sarah Harrop
Article Type:
Legal Update
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The Government has recently published its response to the Ending the Employment Relationship consultation which closed in November 2012.  The Response confirms that: (i) a new system of pre-termination settlement discussions will come into force this Summer and will be supported by a statutory ACAS Code of Practice, optional template documentation and non-statutory guidance; and (ii) the compensatory award for unfair dismissal claims will be capped at the lower of 12 months’ pay or the current overall cap (£74,300 as of 1 February 2013).  In future, the calculation of loss for unfair dismissal awards will also exclude the value of employer’s pension contributions, benefits in kind and discretionary bonuses

Background

The Ending the Employment Relationship consultation, which closed on 23 November 2012, sought views on the nature of the guidance needed to support the provision in the Enterprise and Regulatory Reform Bill that pre-termination settlement discussions will be inadmissible in unfair dismissal proceedings.  In particular, views were sought on the proposed content of a new statutory ACAS Code of Practice and whether template settlement offer letters and a template settlement agreement should be put in place.

The consultation also sought views on proposals to vary the maximum compensatory award in unfair dismissal claims. 

Proposals

Guidance to support new system of settlement discussions

New statutory ACAS Code of Practice (the Code)

It is intended that the Code will set out the following broad principles to underpin the new system of settlement discussions:

  • Either party may propose settlement.
  • The reason for offering settlement should be made clear.
  • Settlement offers are to be in writing, set out what is being offered and what the next steps will be if the offer is not accepted.
  • There is no need to have followed any procedure prior to making an offer.
  • If settlement discussions are handled the wrong way, there is a risk of constructive dismissal.
  • Individuals are to be given a clear, reasonable period of time to respond to an offer.
  • Examples are to be given of what constitutes “improper behaviour”.
  • No “undue pressure” should be put on a party to accept an offer.
  • The employer should not make any discriminatory comments or act in a discriminatory way when making a settlement offer.

Approximately 70% of respondents to the consultation agreed that the principles identified were appropriate. However, there was some concern that the absence of a requirement to follow any particular process before making an offer may undermine good management practice.  The Response confirms, however, that the Government is reluctant to make the Code too prescriptive.  Instead, the accompanying non-statutory guidance will explain how the use of settlement agreements sits within broader good management practices and the type of good practice it is expected businesses will adopt.

Another concern cited by employers’ representatives was that the principle that either party could offer settlement might encourage employees who were intending to resign to propose a settlement in the hope of eliciting a settlement payment.   The Response confirms that it is important to maintain “balance and flexibility” and allow either party to commence the process.  It is noted, however, that where an employee makes a settlement offer, the employer will be protected by the provision that any “improper behaviour” by the employee would mean that the offer would be admissible as evidence in any subsequent claim.  An example of an employee behaving improperly would be where the employee requests settlement and implies that unless the employer agrees they will underperform at work. 

More generally, the Response confirms that the Government intends the Code to support, and not stifle, the ways in which settlement agreements already work and that employers will be able to depart from the underlying principles of good practice where there are sensible reasons to do so.  The Response also confirms that there will be no direct financial penalty for parties who breach the Code.

The draft Code is to be published shortly and will be the subject of a public consultation. 

Template settlement documentation

There was broad support for the inclusion of template documentation in the new Code, although employers were concerned that these documents should not be overly prescriptive.  The Government has decided to include template settlement offer letters in the Code, although it is stressed that the use of these templates is optional and may be amended to suit the particular circumstances.

The Consultation had originally suggested that the template settlement agreement would be annexed to the Code.  However, the Government has elected to keep this with the non-statutory guidance in order that it can be easily updated to reflect any legislative changes.

Non-statutory guidance

Additional non-statutory guidance to supplement the Code will also be developed.  The guidance will explain the practical implications of the new provisions.  This will cover issues such as:

  • The admissibility of settlement offers in multiple claims. 
  • How the rule on inadmissibility applies, and what information will become admissible when an individual asserts that an element of the process has constituted improper behaviour. 
  • How the inadmissibility measure fits with the common law without prejudice regime. 
  • The implications for potential constructive dismissal claims.

The consultation also sought views on whether the guidance should include a guideline tariff (setting out what a fair and appropriate settlement figure would be).  Fifty eight percent of respondents thought that a guideline tariff would not be helpful and might impede settlement negotiations.  Accordingly, the Government has decided not to introduce a guideline tariff, although there will be guidance as to the considerations that may be taken into account when negotiating and deciding settlement figures.

The Government is working towards putting the new settlement discussion regime and accompanying Code and guidance in place by summer 2013.

Unfair dismissal compensatory award

A significant majority of employer respondents felt that a new pay-based cap would help adjust unrealistic expectations amongst claimants, lead to the earlier resolution of disputes and increase certainty on the costs of a dispute.

The Government will, therefore, introduce a new 12 months’ pay cap - subject to the overall cap - on the compensatory award for unfair dismissal.  The new cap will reflect the practice on the ground in Employment Tribunals, which rarely order compensatory awards in excess of 12 months’ loss. 

In addition, the calculation of 12 months’ pay for the purposes of the new cap will use the definition of a “week’s pay” contained in the Employment Rights Act 1996.  This means that claimants will no longer be entitled to recover the value of employer’s pension contributions, benefits in kind or discretionary bonuses.

As to the level of the overall cap, there was no consensus from respondents on whether it should be adjusted and, if so, to what level.  As a result, the Government has decided not to change the overall cap on the compensatory award “at this time”.  On 1 February 2013, the maximum compensatory award will rise from £72,300 to £74,300.

It is anticipated that the changes to the compensatory award will come into force in Summer 2013.

Comment

The introduction of the new system of "off the record" settlement discussions and offers will be welcomed by employers.  However, it is worth remembering that the protection afforded here is very limited and discussions / offers will be inadmissible in ordinary unfair claims only.  The fact and content of such discussions could find their way into other types of proceedings (e.g. wrongful dismissal claim).  Employers who do rely on the new system will need to review the new ACAS Code and guidance carefully to ensure they are acting appropriately and acquire the protection.

The adjustment of the compensatory award is good news for employers who will be able to calculate with more certainty the potential value of an unfair dismissal claim.

Response to Consultation on Ending the Employment Relationship