Protected Conversations in Employment Settlements

The decision to end an employment relationship can be challenging, whether this is due to performance issues, misconduct, or simply a need to part ways. One solution that often arises is a settlement agreement, which is a legally binding contract between the employer and employee that outlines the terms of the employee’s exit. This can include financial compensation, an agreed reference, and other terms, providing both parties with a way to resolve matters amicably and avoid prolonged disputes, legal battles, or the complexities of a formal termination process. There are various statutory requirements that have to be met in order for a settlement agreement to be binding, including that the employee must have received independent legal advice on its terms and effect.

Settlement agreements can be especially beneficial for employers looking to avoid the cost, time, and uncertainty of disciplinary, redundancy, or capability proceedings and the risk of subsequent litigation. Similarly, employees may prefer the certainty of an exit package and a clean break rather than engaging in potentially stressful termination processes.

However, before agreeing settlement terms, both parties must be careful about the discussions they have regarding the termination of employment. This is where the concept of protected conversations comes in, ensuring that the negotiations leading to a settlement agreement are confidential and cannot be used against either party in subsequent legal proceedings should settlement negotiations break down.

In this article, we will explore what a protected conversation is, how it fits into the settlement agreement process, and how employers and employees can navigate these discussions with confidence.

Inadmissibility of settlement discussions

Where the parties are in an actual or contemplated legal dispute, discussions around settlement are generally protected by the common law principle of “Without Prejudice”. This prevents things said or done by the parties, in a genuine attempt to settle their dispute, from being put before the tribunal or court as evidence. Where there is no legal dispute, the Without Prejudice principle does not apply, presenting difficulties for employers wishing to explore exit options before a dispute has actually arisen. However, the Employment Rights Act 1996 solves this problem to some extent by providing that evidence of pre-termination negotiations between an employer and employee is inadmissible in a subsequent unfair dismissal claim. This is where the term “protected” comes from.

What is a protected conversation?

In simple terms, a protected conversation refers to confidential discussions between an employer and an employee, typically around the possibility of a settlement agreement, in which both parties explore an exit from the employment relationship without fear that what is said during those talks can be used in a subsequent unfair dismissal claim.

The aim of this protection is to encourage open and honest discussions to resolve potential disputes before they escalate. For employers, the ability to discuss exit terms confidentially – without the risk of these discussions being cited in unfair dismissal claims – is a crucial tool in managing disputes efficiently.

There does not need to be an existing legal dispute between the parties for a conversation to be protected. This is why such discussions can sometimes come as a surprise to an employee.

The legal framework

Under Section 111A of the Employment Rights Act 1996, evidence of pre-termination discussions related to the termination of employment is generally inadmissible in any subsequent legal proceedings for ordinary unfair dismissal claims. This inadmissibility extends to the fact of the discussions, not just the content, so if a dispute arises over the dismissal, the fact that a settlement proposal was made – or the terms of that proposal – cannot be brought up in tribunal proceedings.

However, there are important exceptions to this statutory protection. The protection is limited to ordinary unfair dismissal claims and so does not apply, for example, in cases involving claims of automatic unfair dismissal, discrimination, whistleblowing, or breach of contract. In these cases, discussions about settlement terms may be admissible in tribunal proceedings (unless the Without Prejudice rule applies), so employers and employees must exercise caution when considering a protected conversation in those circumstances.

Section 111A(4) of the Employment Rights Act 1996 includes an impropriety exception too, where if either party behaves improperly during the settlement negotiations, such as by using undue pressure, coercion or threats, the protection may be lifted and the tribunal could allow evidence of those conversations to be used in a subsequent unfair dismissal claim. Employers must avoid negative behaviours that could undermine the confidentiality protections afforded here.

The role of Acas in protected conversations

The Acas Code of Practice on Settlement Agreements provides helpful guidelines for both employers and employees. It suggests that:

• Employees should be given a reasonable period of time to consider the proposed settlement agreement. As a general rule, an employer should give an employee at least 10 calendar days to consider the proposed formal written terms of a settlement agreement and to receive independent legal advice. This is to avoid the risk of the employee being unduly pressured into making a decision quickly.
• Although not a legal requirement, an employee should have the right to be accompanied by a colleague or union representative. This may help to progress settlement discussions.

In the event of a dispute over the conduct of the settlement discussions, Acas provides guidance on what constitutes “improper behaviour”, including undue pressure, harassment, bullying, intimidation, unlawful discrimination, actual or threatened physical assault or other criminal behaviour. Undue pressure includes not giving the employee a reasonable period of time to consider the offer and telling an employee before any disciplinary process has begun that if they reject an offer they will be dismissed.

Employment tribunals must take the Code into account where it is relevant to any question arising in the proceedings and so will take into account when deciding whether there has been any improper behaviour during a pre-termination meeting amounted.

The recent case of Gallagher v McKinnon’s Auto and Tyres Ltd considered whether an employer’s conduct during pre-termination amounted to improper behaviour.

What happened in Gallagher v McKinnon’s?

Mr Gallagher had been on sick leave due to ill-health and a foot injury. He was invited to a meeting to discuss his return to work, and was surprised to instead be presented with a verbal settlement offer to leave the company, as the directors of the company had realised during his absence that they could cover his role. Mr Gallagher was not expecting this, and was further told that he had 48 hours to consider the offer and, if he rejected it, the company would have to go through a redundancy process with him.

Mr Gallagher sought to rely on these discussions in his subsequent unfair dismissal claim after his employment was terminated for redundancy. The Employment Tribunal considered whether there was undue pressure or other improper behaviour that would allow the lifting of the protection provided for the discussions and allow Mr Gallagher to rely on them as part of his claim. The judge did not accept Mr Gallagher’s position, and he appealed to the Employment Appeal Tribunal, arguing that there had been undue pressure on him and claiming that:

1. The Employment Tribunal erred by failing to find improper behaviour where the company’s directors had told him they could cover his role, and that he had been made redundant. He argued that this indicated that he would be dismissed if he did not accept the offer, and this was an example of undue pressure under the Acas code.
2. The meeting had been set up under false pretences, misrepresenting it as a ‘return to work’ discussion when in reality it was to propose severance terms. This was misleading and the ‘surprise element’ exerted further undue pressure on him.
3. He was only given 48 hours to respond and this was inadequate and fell short of the 10 days suggested by Acas.

The EAT judge began by considering paragraph 18(e)(ii) of the Acas Code which states that it can be undue pressure for an employer to say, before any form of disciplinary process has begun, that the employee will be dismissed if a settlement proposal is rejected. The judge noted that the Code analyses undue pressure in the context of a disciplinary process, not a capability or redundancy process, and that this is an important distinction. In the context of a disciplinary process, an employer who says that an employee will be dismissed if they reject a settlement proposal has effectively predetermined the outcome of the investigation and disciplinary process. In that scenario, an employee is more likely to feel undue pressure to sign a settlement agreement. However, a redundancy process is different as generally, employers are best placed to decide how their workforce should be structured and to identify where redeployment opportunities may exist. Moreover, confirmation that a role is redundant does not inevitably mean that the person who previously performed that role will be dismissed.

In this case, the employment judge had found that the employer’s view that the role performed by Mr Gallagher was redundant did not equate to a firm conclusion that his dismissal would follow. The directors had not told Mr Gallagher that he would be dismissed if he rejected the offer, merely that a redundancy process would follow.

Turning to the argument that he had been given insufficient time to consider the offer, the Code’s suggestion of 10 calendar days is to consider the proposed formal written terms of a settlement agreement and to receive independent advice. In this case, Mr Gallagher was given 48 hours to consider the verbal offer, which the EAT found was different. Had he accepted the offer, he would then have been presented with a written settlement agreement.

Although the Employment Tribunal judge had not been happy with the “false pretences for the meeting” and considered it unfair, she did not find that the employer behaved improperly overall. The Employment Tribunal did not consider that the director had deliberately misrepresented or lied about the purpose of the meeting.

The EAT therefore agreed with the Employment Tribunal that there had been no impropriety on the part of the employer that would enable the fact and content of the pre-termination negotiations to be admissible in Mr Gallagher’s unfair dismissal claim.

Conclusion

Protected conversations provide employers with a valuable tool for managing employee exits in a way that minimises the risks of future legal claims. Gallagher highlights that employers can hold these conversations with confidence as long as they avoid improper behaviour. The employer’s conduct of the negotiations could have been better, but no impropriety was found on its part. Although the Acas Code links threats of dismissal if a settlement offer is refused, to disciplinary situations, it is important to remember that this is just one example of undue pressure. Employers should be careful not to tell employees that they will be dismissed if they do not accept a settlement offer as another Employment Tribunal could conclude that this constitutes undue pressure. Nor should employers assume that a deadline of 48 hours to accept a verbal offer will always be sufficient.