Paying off a disgruntled departing employee is a common but widely misunderstood process which can be fraught with risk, particularly as Isle of Man employment settlement agreements differ significantly from their UK counterparts.

Such settlement agreements are used to resolve a dispute between an employer and employee usually relating to severance terms. If the agreement is done properly, it is binding on the parties. If not, there remains a chance that the employee still has the right to pursue some claims against the employer contrary to the spirit of the agreement.

The Isle of Man’s position is different because Tynwald has not legislated for a statutory compromise agreement in the way the UK did. Until 1996 to ensure finality UK employment settlement agreements had to be negotiated through ACAS because of the statutory bar on contracting out of employment protection rights. Legislation then introduced regulated compromise agreements which allowed a private settlement of such rights provided there was the safety net of the employee being advised by a relevant independent adviser, that is a suitably qualified lawyer who could certify advice had been given to the employee about the waiver of statutory rights.

The pre-1996 UK position effectively still remains in the Isle of Man, with the Manx Industrial Relations Service (“MIRS”) in the role of ACAS. Local businesses reliant on human resource functions in Britain can overlook this significant difference between the two jurisdictions’ systems. Thus an employee leaving a Manx employer under a privately negotiated settlement agreement that is not conducted through the auspices of MIRS could in theory still exercise his/her statutory rights under the Employment Act 2006 to claim, for example, unfair dismissal. Funds paid to that employee under the settlement agreement would likely be taken into account in any subsequent award at tribunal but the cost, loss of management time and general hassle of dealing with a tribunal claim – which are frequently the driving factors behind an employer settling – would be highly frustrating for an employer who thought all these things had been put to bed.

There is a wider moral issue at play in regard to employment settlement agreements. They can be a shortcut to dismissal rather than going through proper procedures such as dealing with an employee who may have capability issues. Labour law requires an employer to adopt a fair process and act reasonably and in turn that will generally mean allowing time and due process to resolve issues such as competence. Businesses can lose patience with the statutory framework of the five designated reasons for dismissal coupled with the reasonableness requirement and seek a shortcut. This may be why David Cameron was keen to promote the “no fault compensated dismissal” in the UK until consultation somewhat surprisingly revealed little appetite amongst businesses. But few would dispute that over-reliance on termination by employment settlement agreements as a way of managing workforce issues starts to affect existing staff morale. Such agreements should not replace a fair process.

When they may be appropriate, settlement agreements must be carefully canvassed then prepared and tailored to each particular situation. Canvassing possible departure with the employee by way of a settlement agreement must be sensitively handled for a whole host of reasons. For instance, a premature approach to an employee might be admissible in evidence in a subsequent claim even if it is labelled without prejudice, it would depend on the circumstances. Further, inappropriate early suggestion of a settlement agreement by employers dealing with a long term sickness absence could also risk a discrimination claim, particularly once equality legislation is enlivened here and disability issues can arise.

When drafting an agreement, a scattergun approach to listing every conceivable claim under the sun is incorrect. Some claims can properly be excluded from a general waiver. Tax issues arise as some funds paid to the employee may benefit from a concession if certain conditions are satisfied. There are many optional clauses that could assist the situation. Work references and public or internal announcements should be considered. In short, settlement agreements can involve complex issues and drafting points.

Conciliated settlement agreements through the excellent MIRS in the Isle of Man are a frequent and effective manner of dealing with disputes and departures where often neither employee nor employer wants to litigate the dispute. They play a large part in controlling the number of tribunal claims. These largely invisible brokered settlements represent the sub-sea part of the iceberg with the visible tip being the claims that reach the tribunal stage. For employers wishing to effect such settlements, however, finding an English precedent on the internet or failing to take proper Manx law advice can prove costly in that the very evils the settlement seeks to avert can come back to haunt the employer.

John Aycock is head of the Employment Unit at M&P Legal, a top ranked law firm in this field, and is qualified to advise on both Manx and English law employment settlement agreements.

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