4 May 2023 by Susanna Spencer

Termination of employment and settlement offer – one letter or two?

Dealing with settlement discussions and termination of employment can be tricky for an employer to navigate.  

There is often confusion about the meaning of the ‘without prejudice’ rule and when this label should be applied to communications between employers and employees.

What is ‘without prejudice’ and when is it needed?

Marking communications ‘without prejudice’ means that the communications cannot be relied on as evidence in a court or tribunal. It is a way of encouraging parties to a dispute to try and resolve matters without needing to resort to litigation.

The ‘without prejudice’ rule will only apply where there is an existing dispute between the parties, and where the communication is part of a genuine attempt to reach a settlement of that dispute. It will not apply where a party acts with ‘unambiguous impropriety’, for example in cases of blackmail.

‘Without prejudice’ discussions are very common in the employment sphere as a way of negotiating an agreed exit under a settlement agreement. It is also common to offer a dismissed employee a settlement agreement on a ‘without prejudice’ basis in exchange for them waiving their rights to bring an Employment Tribunal claim.

There will usually be two streams of correspondence – ‘without prejudice’ discussions / negotiations and separate ‘open’ correspondence, communicating ‘on the record’ work matters such as a decision to dismiss.

Can one letter be used for everything?

The employer had to consider this issue in the recent case of Meaker v Cyxtera Technology UK Ltd.

Mr Meaker was employed in a heavy manual night role. He suffered back injuries which meant he was unlikely to be able to carry out his role any longer.

Following some initial discussions about potential termination of Mr Meaker’s employment and the possibility of a settlement agreement, the employer, Cyxtera Technology UK Ltd (“CT”) sent Mr Meaker a letter dated 5 February 2020 which was headed ‘without prejudice’. The letter stated that:

  • Mr Meaker’s employment would be terminated ‘by mutual agreement by reason of capability’;
  • his last date of employment would be 7 February 2020;
  • he would receive payments in respect of notice pay and holiday pay;
  • CT would send him his P45;
  • an additional ‘ex gratia’ payment would be made if Mr Meaker entered into a settlement agreement.

The timing of the termination of employment was important.  If the letter constituted a valid ‘open’ termination letter, then Mr Meaker’s unfair dismissal claim would be out of time. Conversely, if the letter did not constitute a valid termination letter, Mr Meaker’s dismissal would only take effect when he received his notice pay (a week later), and his claim would be in time.

Amongst other matters, Mr Meaker argued that the letter of 5 February 2020 did not have legal effect as an ‘open’ termination letter given its ‘without prejudice’ label, combined with the fact that his employment was stated to be terminated by ‘mutual agreement’, which was not the case.

CT argued that, despite its ‘without prejudice’ label, the letter could properly be construed as a valid dismissal letter, whilst also benefitting from the ‘without prejudice’ rule in relation to the part describing the settlement offer.

The Employment Appeal Tribunal (“EAT”) found in CT’s favour, holding that, in the particular circumstances, the letter could properly be separated into two components. However, this was a fact sensitive decision and there were a number of points for reaching this conclusion, including:

  • the letter did not come out of the blue – CT and Mr Meaker had already discussed the fact that Mr Meaker could likely not return to his role for health reasons, and termination of employment had been previously contemplated;
  • due to the way the letter was drafted, it could logically be separated into one part confirming that Mr Meaker would be dismissed and what payments he would receive, and a further separate part detailing the settlement offer;
  • despite the reference to termination of employment being by ‘mutual agreement’ (which was also the wording of the proposed settlement agreement), the fact that Mr Meaker’s employment was to terminate on 7 February 2020 was very clear, and it was not contingent on anything else happening. In other words, Mr Meaker could choose whether or not to sign the settlement agreement and receive the ex-gratia payment, but this would not change the fact his employment would be terminated.

What should employers do?

As the case of Meaker shows, it is possible to use one letter both for ‘open’ correspondence communicating a dismissal and making a ‘without prejudice’ settlement offer. The document in question must be analysed in its full context to ascertain whether and to what extent the ‘without prejudice’ rule applies.

However, the EAT did comment that “it may be safer, to avoid possible confusion, to convey open and without prejudice communications in separate documents”.

We would certainly advise that this is the case and that ‘without prejudice’ correspondence should be kept separate to ‘open’ correspondence, especially where the correspondence in question communicates a dismissal. This should avoid ambiguity and potential disputes over the applicability of the ‘without prejudice’ rule, whilst also making negotiations more straightforward.

If you require any assistance for your business with handling terminations of employment or settlement agreements, please do not hesitate to get in touch with our expert Employment team.

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