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What is the difference between settlement agreements and compromise agreements?

We don’t really know yet.

At the second reading of the Enterprise and Regulatory Reform Bill yesterday, Vince Cable set out the government’s plans to allow employers to offer “settlement agreements”. Employers would be able to offer to pay an employee compensation for entering into a settlement agreement, either before or after a dispute arises.

The employee will be able to choose whether or not to accept the offer. If it is rejected, and an unfair dismissal claim lodged, the fact that the employer made the offer would be inadmissible as evidence during the tribunal proceedings. Currently, if the offer of a compromise agreement is rejected, that fact can only be withheld from the tribunal if the offer was truly made on a “without prejudice” basis (for which there must have been a pre-existing dispute).

The government has stressed that settlement agreements are not designed to replace proper performance management but believes that, where both parties recognise that it is beneficial for the employment relationship to end, the new system will make it easier and quicker to do so, particularly for smaller employers. A consultation will be published in the summer with guidance on using settlement agreements, draft letters and model templates.

It is unclear at the moment how radical this proposal is and whether it goes further than renaming and simplifying compromise agreements. As always, the devil will be in the detail. For example, will an employee be required to obtain independent legal advice before signing a settlement agreement? Will it be possible for a settlement agreement to contain a full waiver of all of the employee’s employment related claims?

We also don’t yet know whether settlement agreements would be instead of, or as well as, the previously announced proposals to introduce compensated no-fault dismissals for micro-businesses and protected conversations.

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