Government proposes extended settlement agreements which will be inadmissible in tribunals

Under the plans, to be introduced as part of the Enterprise and Regulatory Reform Bill, employers and employees will be able to reach an agreement before a formal dispute arises and will be legally protected from the offer or related discussions being used as evidence in any future unfair dismissal tribunal.

Employees would be able to reject any offer without affecting their employee rights and refer the dispute to a tribunal if they wish. Employers would still need to follow "a fair process" before they will be able to dismiss an employee.

The proposals are distinct from so-called 'compensated no-fault dismissal', recommended by venture capitalist Adrian Beecroft in his Government-commissioned report on employment law reform. A call for evidence on Beecroft's plans, allowing companies with ten staff or fewer to dismiss staff on payment of a set amount of compensation, closed on Friday.

Settlement agreements, currently known as 'compromise' agreements, are already available to employers in some circumstances. Encouraging more employers to use them at an earlier stage would, said Cable, "deliver results for employees and employers".

"Settlement agreements ... [empower] employers by enabling them to keep their workforce flexible and [encourage] alternative ways of solving workplace problems rather than resorting to a tribunal," he said. "But crucially it does so in a way that keeps the necessary protections for employees in place. Our proposed measures and guidance will achieve this objective. Making this approach simple to use will encourage employers to take on staff in the knowledge that there is an effective mechanism for dealing with serious problems if they occur."

The Government will consult in the summer on guidance for using the new agreements, including draft letters and model templates for employers and employees to use. The proposal itself will be introduced at Committee stage as the Bill passes through Parliament.

Employment law expert Gary Freer of Pinsent Masons, the law firm behind Out-Law.com, said that the proposal was "well-intentioned" and would offer underperforming employees a "dignified exit". Employers were "often reluctant" to initiate the process under the current regime because the fact that they had done so could sometimes be later used against them in subsequent tribunal or court proceedings, he said.

"Employers do quite often find themselves in a situation in which an employee is, for whatever reason, not performing well," he said. "One option will be to start a formal performance management process; but all too often that will not produce the required improvements and will be time-consuming, expensive and stressful for the employer, employee - particularly those nearing retirement - and the workforce as a whole. These agreements would often be a better option for everyone."

However, employers and employees will have "various questions" before the detail of the proposals is published, he said, such as whether employees will be allowed to be accompanied by a colleague or trade union representative for any discussions as is the case during formal disciplinary proceedings. In addition, employers could be deterred from using settlement agreements if an employee was allowed to allege victimisation if he or she refuses to engage in the process and is subsequently formally disciplined, he said.

The nature of extent of the conversations which will be "protected" from being used will also need to be considered, he said. Employers are currently not protected if what they say is alleged to be an "unambiguous impropriety" – a phrase which, said Freer, has been interpreted very widely by employment tribunals.

"What this Government should at all costs avoid is the implement well-intentioned legislation designed to facilitate the amicable resolution of disputes which will itself generate more not less 'satellite' litigation about matters of procedure," he added.

The Enterprise and Regulatory Reform Bill, which is currently before Parliament, contains measures aimed at improving the employment tribunal system and will pave the way for giving company shareholders binding votes on executive pay.