Negotiating exit packages

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Exit packages

Paul Archer, head of employment law at Lemon & Co Solicitors, advises on parting company with employees by negotiating exit packages, particularly in light of recent developments in the law concerning the 'without prejudice' rule.

All HR professionals know that there are sometimes cases when it is important for an employer to part company with an employee, even where any dismissal is likely to be unfair. Although dismissals for redundancy or gross misconduct can be undertaken with reasonable speed, the disciplinary process that is required in cases of poor performance or ordinary misconduct can be painfully slow.

To make matters worse, the process of holding formal disciplinary hearings (in compliance with the statutory disciplinary procedures) and then giving warnings is a stressful business for all concerned. It is not uncommon for employees to 'go off sick' suffering from stress-related illnesses as a result of the stress involved in a disciplinary process.

"It is, of course, difficult and complicated to follow disciplinary procedures against those who are off with stress or who are bringing grievances."

It is also common for employees to feel that formal disciplinary procedures are unfair (or even a kind of bullying, harassment or victimisation) and then launch into formal grievances against those involved in the disciplinary process. It is, of course, difficult and complicated to follow disciplinary procedures against those who are off with stress or who are bringing grievances.

In these circumstances, it is not surprising that HR professionals often consider the possibility of reaching a settlement agreement at an early stage under which the employee leaves with an agreed sum of money subject to a compromise agreement.

Compromise agreement

Indeed, this is sometimes the best outcome for the employee as well as employer – the aggrieved employee who is suffering from stress sometimes just wants to leave and look for another job but feels that they need some kind of financial support to enable them to do so.

There are various conditions that have to be met for a compromise agreement to be valid. The key points are that the employee must receive independent legal advice; the agreement must be in writing and specify particular claims; the independent legal adviser must be identified in the agreement; and the agreement must state that the conditions regulating compromise agreements have been met.

However, this much is fairly straightforward and compromise agreements are not unduly difficult to draft and administer. The real difficulty is how to approach the employee about the possibility of settlement in the first place. In this respect, there are two serious risks.

The first risk is that an employee approached about the possibility of settlement will resign and bring a claim for constructive unfair dismissal. If the settlement proposal is not put to the employee in an appropriate manner, then the employee may be able to persuade an employment tribunal that it amounted to a 'vote of no confidence' and was likely to seriously damage trust and confidence in the employment relationship.

The second risk is that the employee will simply refuse the proposal of settlement and be unwilling to negotiate any reasonable compromise. The employee then remains in employment and may be in a position to use the fact of the settlement offer to challenge the legitimacy of any future disciplinary action or dismissal. In simple terms, the employee will argue that the employer (by making the settlement offer) pre-judged the situation and any future disciplinary / dismissal procedure was a sham.

On the record

The legal difficulties arise because there is a serious risk that any settlement offer will be 'on the record'. This means that the employee who is claiming unfair dismissal or statutory discrimination at the employment tribunal will be to able refer to the settlement offer to challenge the credibility of the employer.

"If the settlement proposal is not put to the employee in an appropriate manner, the employee may be able to persuade an employment tribunal that it amounted to a 'vote of no confidence'."

It is sometimes suggested that employers can get around this problem by stating that any settlement offers are made on a 'without prejudice' basis. However, unfortunately for employers, there are severe limitations on the 'without prejudice' rule and the simple fact that an offer is stated to be 'without prejudice' will not mean that it is actually so in practice.

In summary, the legal position is that the 'without prejudice' rule only applies where there is a dispute between the parties such that the parties contemplated (or could reasonably be expected to have contemplated) litigation if they did not agree settlement. The rule obviously applies when the employee is in the process of bringing a claim at the employment tribunal, but is much less likely to apply if the employee remains in employment.

If the employee has not indicated that they are considering the possibility of any claim at the employment tribunal (or any other legal claim) then the settlement offer will almost certainly be on the record even if that employee is in the middle of a disciplinary process. Furthermore, the simple fact that an employee is bringing a formal grievance does not of itself mean that the 'without prejudice' rule applies unless the employee is contemplating litigation.

Proposal of settlement

Given the limitations and uncertainty of the without prejudice rule, the safest course of action for HR professionals is to work on the assumption that a proposal of settlement to a current employee may be on the record and may therefore one day be disclosed to an employment tribunal. In these circumstances, it is important that any proposal of settlement is presented in such a way as not to damage the future prospects of defending an unfair dismissal or statutory discrimination claim.

The starting point is that it is advisable to make any proposal of settlement in writing so as to minimise the scope for future dispute about what was actually said and done. It is often a good idea to present the proposal as a response to concern about the welfare of the employee – for example where the employee is suffering from stress or otherwise unhappy in the workplace.

It is absolutely essential to explain in any letter that the employee is under no obligation at all to accept any settlement proposal. You must make it clear that, as an employer, you are happy for that person to continue in employment and are prepared to address any issues in the appropriate way (for example, through the formal disciplinary or grievance procedures). The key points are that you should not be seen to be putting pressure on the employee to leave or seen to be pre-judging the outcome of any future disciplinary or grievance procedure.

In practice, of course, most employees will be open to the possibility of settlement and it will often be no more than a question of how much money. However, presenting settlement offers carefully and 'diplomatically' will minimise the risks involved in dealing with employees who are less keen to negotiate.

The employment law team at Lemon & Co Solicitors are running a free seminar on 'Losing Employees By Negotiating Exit Packages' on Wednesday 21 November 2007 from 5.00pm to 6.30pm at the Thistle Hotel in Swindon. To book on this seminar, or for more details on the firm's legal services, call Paul Archer, head of employment law, on 01793 509833.

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