Employer-friendly case on settlement agreements
Some important caselaw from the Employment Appeal Tribunal has arrived in 2016, with important implications for how settlement agreements work (you may want to see our article on settlement agreements for an explanation of this term).
This case is a good springboard to examine the ‘without prejudice’ rule and look at s111A of the Employment Rights Act 1996 on protected conversations.
Be warned! This article discusses intricate details of what you are and are not allowed to tell a judge about “fireside chat” conversations that can lead to an employee resigning because they no longer feel welcome at a company.
“Fireside chat” is not a term used by employment solicitors. We use the phrase “settlement discussion” to refer to discussions, emails and documents where an employer puts to an employee the suggestion that they part company amicably and agree a price and other terms (confidentiality, a reference etc) for doing so.
Suggesting this to an employee can sever the employment relationship, because it effectively says “we don’t want you here any more”. This is constructive dismissal, if the employee resigns.
Before David Cameron and the coalition government took office, there was (and still is) a helpful piece of law to employers in the form of the ‘without prejudice’ rule. This rule allows a party to proceedings (not just employment tribunal cases) to keep from the judge’s eyes any communication aimed at reaching an amicable settlement of a dispute.
Once the chain of communication benefits from the ‘without prejudice’ rule, the employer can rest safe in the knowledge that the employee can’t bring an employment tribunal case because he wouldn’t have the smoking gun (the communication) as evidence.
So an employer would create a phoney dispute and then put the suggestion. It could start a disciplinary process and wait for the employee to reject the allegations by defending himself. Then start a ‘fireside chat’, with the ‘carrot and stick’ approach. Either the employee takes the carrot of the settlement agreement or faces the disciplinary stick. Depending on the amount offered, most employees take the carrot.
But this approach has problems. What if the employee plays the ‘contrite apology’ card? What if the employee defends himself but accepts that the employer was within its rights to start the process? There would be no dispute and the offer is not ‘without prejudice’. Employers could leave themselves vulnerable when they only wanted to see what price the employee would accept in order to go. They don’t see why just asking the question should effectively increase the price.
The big 2013 change – s111A
The change brought in by David Cameron was to allow employers to ask an employee if they would depart in return for a sum of money, when there was no dispute, without the employee being able to tell a judge about it in an unfair dismissal case.
The change is enshrined in s111A Employment Rights Act and uses the term ‘protected conversation’.
The 2016 case – Faithorn Farrell Timms LLP v Bailey
What does this case say?
It’s about the details. Until now, lots of questions have been unclear.
- Does s111A protection mean that an employee facing a carrot/stick disciplinary can string out a settlement discussion then resign because the disciplinary took too long?
After all, s111A prevents the judge being told about the existence of the carrot but not the existence of the stick. Maybe a judge can say that s111A only protects a genuine negotiation and that a dragged-out process is not a genuine negotiation.
- Can the parties agree to tell the judge about the settlement discussions? That is, can they waive the benefit of the s111A rule?
Sometimes both sides think it will help their case if the judge knows what was discussed at a meeting. Eg if a manager said “you’re a good performer, but you can’t work with others”, the employee may want to tell the judge about the first part and the employer may want to use the second .
- For that matter, there is a long history of parties waiving the protection of ‘without prejudice’ protection by accidentally referring to negotiations in letters and litigation documents. Can that happen with s111A?
- Does s111A stop a judge being told that a protected conversation took place or (as with the without prejudice rule) does it just stop the judge being told what was discussed in it?
- In what circumstances does an employer lose the benefit of the s111A protection?
For example if he gives a choice between signing a settlement agreement or a punch in the face, surely the law shouldn’t stop the employee resigning and referring to the Hobson’s choice? What about non-violent conduct, eg wanting to part company with an employee because of his skin colour?
The protection of the ‘without prejudice’ rule is lost where there is unambiguous impropriety”. The protection of s111 is lost where there is “improper behaviour”. So do these two terms mean the same thing?
- What if the employer has no intention of negotiating a departure but is just using the rule to be nasty to the employee? Should the employer be allowed to get away with that?
- Does s111A protection protect internal employer discussions or only discussions with the employee?
- For both types of protection, where is the line between negotiations (which are protected both under s111A and the ‘without prejudice’ rule) and stating your legal position (not protected by either rule)?
Typically, in a ‘fireside chat’ letter the employer may write something like this: “You have messed up six times and cost us a lot of money. Two clients refuse to work with you. In our fireside chat conversation you admitted setting fire accidentally to the kitchen. We want to offer you £10,000 to leave.”
It would suit the employer nicely to have everything except the last line before the judge. It would suit the employee to have only the last line before the judge. A compromise would be to keep the whole document from the judge. Are the allegations in this example a background part of the negotiation or separate from it? If background, then they get the protection of s111A and the without prejudice rule. If separate, they don’t.
So, those were the burning questions! This case answered them like this
- No, a party is not allowed to mislead the tribunal. If they claim wrongly that they resigned constructively because a disciplinary process was strung out, the employer is allowed to point to the fact that a settlement discussion was happening to overcome the constructive dismissal claim. This will not open the gate for the employee to rely on the settlement discussion for his constructive dismissal claim; he would now be shown to have tried to mislead the tribunal and probably would lose their credibility and the case with it.
- No, the parties can’t agree to dispense with s111A and tell the tribunal about the settlement talks. This is because the Employment Rights Act says that parties may not contract out of any statutory protections in the Act.
- As parties can’t waive s111A protection deliberately, they certainly can’t do it by accident. In this case, the employer made a mistake and accidentally waived the ‘without prejudice’ protection by referring to settlement discussions in its response to the employment tribunal claim. This didn’t matter to the unfair dismissal claim, which is also covered by s111A, but it still mattered to the discrimination part of the claim.
- s111A stops a judge being told that a protected conversation even took place, not just what was discussed or how much was offered. The ‘without prejudice’ rule only stops the parties telling the judge what was discussed, not that a discussion took place.
- An employer may lose the benefit of the s111A protection if there is “improper behaviour” and may lose the benefit of ‘without prejudice’ protection if there is “unambiguous impropriety”. The case says that lies, violence and “blatant discrimination” will probably be both.
Conduct that is not serious enough to be “unambiguous impropriety” may still be “improper behaviour”. There are no examples of this yet. But it makes it easier for the protection under s.111A to be lifted compared to “without prejudice” privilege.
- If an employer has no intention of negotiating a departure but is just using the rule to be nasty to the employee then this case says that s111A would no longer apply. So that matches the situation with the ‘without prejudice’ rule. But good luck to any employee who tries to prove that – it would be hard!
- Does s111A protection protect internal employer discussions? Yes. Just like the ‘without prejudice’ rule. So managers can discuss the situation with HR without fear that an employee will be able to show their emails to a judge at a later date.
- Where is the line between negotiations and stating your legal position? Unhelpfully, the case says it’s a decision for the judge on the day. But this has always been the case for the ‘without prejudice’ rule anyway so it wasn’t a surprise to employment solicitors. We think that letters containing the usual “background, carrot and stick” will usually be held to be completely covered by s111A.
Case report: Faithorn Farrell Timms LLP v Bailey
By Gareth Davies, with additional reporting by Jeffrey Yip