In January, the Government issued its response to the recent consultation, “Ending the Employment Relationship”. It covers a number of proposals but two are worth highlighting in particular: first and arguably most significant is the new cap on unfair dismissal compensation; secondly, new rules for pre-termination settlement offers.

The current maximum compensatory award for unfair dismissal is £74,200. The new cap will be a maximum of one year’s pay or £74,200, whichever is lower. Given that the average annual wage in the UK last year was in the region of £26,500, the new cap will be relevant for many employees. It is also worth noting that, seemingly, a year’s “pay” for the purposes of the new cap will be calculated by reference to the current statutory definition of a week’s pay. As such, it will not include pension, benefits, expenses or discretionary bonuses.

But is this really going to affect the amounts awarded by employment tribunals? In most unfair dismissal cases, a year’s pay would be at the top end of what a successful employee would be likely to achieve at tribunal and the statistics for the year ending March 2012 show an average compensatory award of just over £9,000. So perhaps the greater practical impact of the new cap will be to manage employees’ expectations as to the value of their claim and we may see a greater willingness for early settlement discussions. There is however the risk that the new limitation could encourage employees to look to combine their unfair dismissal claim with an uncapped claim, such as whistle-blowing or discrimination, in an attempt to circumvent the cap and maximize compensation.

Whatever your view on the change, it is coming in fairly soon. The Enterprise and Regulatory Reform Bill, which is currently going through the parliamentary process, gives the Secretary of State the power to change the cap but further legislation will be needed to exercise that power. As a result, it is anticipated that the change to the cap will come into effect in the Summer.

The consultation response paper also deals with the proposal that pre-termination settlement offers made to employees will be inadmissible as evidence in a subsequent unfair dismissal claim, unless there has been “improper behaviour”. A clause implementing this has been drafted into the Enterprise and Regulatory Reform Bill and a Code of Practice has been developed by ACAS to accompany the legislation. ACAS says that the aim of the Code is “to help employers and employees negotiate settlement agreements by providing a clear explanation of the law as it relates to the confidentiality provisions of such negotiations".

The first limitation on the new rule is the exclusion for improper behaviour. Whether this has occurred will be a decision for the tribunal, but the draft Code of Practice sets out some examples. These include all forms of harassment, victimisation, discrimination and putting undue pressure on a party. It is a somewhat wider concept than the unambiguous impropriety test which applies to the without prejudice rule, although the two are closely linked.

More significantly, the scope of the new rule is much narrower than had initially been proposed by the Government. Originally, the intention had been to allow “protected conversations”, i.e. off the record discussions between an employer and employee about bringing the employment to an end. Historically, such conversations have been problematic because they will be admissible in a later claim unless they can be said to be “without prejudice”. Truly without prejudice conversations are only possible where there is already a dispute of some sort underway with the employee and in the case of many off the record discussions, this is not the case. The new rule was anticipated to offer a relaxation of the without prejudice rule but instead it has ended up disappointingly narrow in scope.

First, it will only apply to the settlement offer itself and seemingly will not extend to the conversations leading up to the offer being made. Secondly, it will only extend to unfair dismissal claims and not to claims such as discrimination, where offers made would remain admissible in subsequent litigation. So all in all, if employers want to have off the record discussions about terminating employment, the safest route is likely to remain the without prejudice one. Despite the difficulties that entails, provided some thought is given the process leading up to the first conversation, and the employee agrees to speak on that basis, then the risks of subsequent disclosure in a tribunal claim will be limited.