Settlement discussions - when can employers safely use the 'without prejudice' rule?

This post was written by Michael D. Smith.

For employers wanting to bring an employment relationship to an end, whether for disciplinary or performance related reasons or simply because it is not working out, it is often difficult to judge the right time to have a ‘without prejudice’ conversation with an employee. Get it wrong and the contents of that discussion may be used by an employee in a subsequent Tribunal claim as evidence of an admission of guilt or constructive dismissal. The recent EAT case of Portnykh v Nomura International Plc gives some useful guidance as to when the ‘without prejudice’ rule applies.

The ‘without prejudice’ rule

The ‘without prejudice’ rule means that communications between parties in an effort to resolve an actual or potential dispute are inadmissible in any subsequent court or Tribunal proceedings. This is important for an employer who may be involved in a dispute with an employee and wishes to bring the relationship to an end with an offer of settlement. If the ‘without prejudice’ rule does not apply, there are two very significant risks for employers in offering a settlement package to end the employment relationship:

  • Any offer of a financial settlement by an employer may be used by the employee as evidence of the employer’s ‘guilt’.
  • If the employer is concurrently running a disciplinary or performance management procedure and offers settlement to cut the procedure short, but the employee is not interested, the employee could use the offer as evidence that the employer is not interested in the ongoing performance management or disciplinary procedure, and resign and claim constructive dismissal.

There are limits, however, to the ‘without prejudice’ rule. It cannot be used to hide perjury, blackmail or ‘unambiguous impropriety’ (for example, blatant unlawful discrimination).

Two points about the ‘without prejudice’ rule can cause difficulty for employers:

  • When exactly are the parties ‘in dispute’ so the ‘without prejudice’ rule applies?
  • What is ‘unambiguous impropriety’?

The Portnykh case provides some useful guidance on these issues.

Mr Portnykh’s Case

Mr Portnykh was employed by Nomura, who sought to dismiss him for misconduct. Nomura alleged that Mr Portnykh had approached them requesting that his dismissal be categorised as being for redundancy. The parties then attempted to negotiate a compromise (now settlement) agreement and correspondence marked ‘without prejudice’ passed between them. The negotiations failed and Mr Portnykh brought a claim for unfair dismissal for making a protected disclosure (i.e. claiming he was a whistleblower). Nomura argued before the Tribunal that the correspondence marked ‘without prejudice’ should be admissible on the basis that there was no dispute between the parties or, if there was, that the ‘unambiguous impropriety’ rule applied because Mr Portnykh was trying to categorise his dismissal as something different to that in the ‘without prejudice’ correspondence. 

The Tribunal agreed with Nomura. It found that the fact that the parties were in negotiations about a compromise agreement did not mean they were in dispute. Furthermore, even if there was a dispute, it would be an improper abuse of the ‘without prejudice’ rule for a Tribunal hearing the whistleblowing claim not to be aware that Mr Portnykh may have previously argued that his dismissal should have been categorised as a redundancy.

Mr Portnykh successfully appealed to the EAT which ruled that the ‘without prejudice’ correspondence was inadmissible. In coming to its decision, the EAT made some interesting observations on the ‘without prejudice’ rule:

  • In order to determine whether there is an actual or potential dispute, a Tribunal will need to examine the context in which any correspondence marked ‘without prejudice’ is produced, and not simply focus on the correspondence itself.
  • The fact that the parties are negotiating an exit does not necessarily mean that there is an actual or potential dispute.
  • The fact that a settlement agreement is being negotiated does not automatically mean that there is an actual or potential dispute between the parties but that will very often be the case.
  • The fact that Nomura and Mr Portnykh were discussing alternatives as to the reason for Mr Portnykh’s dismissal meant that there was either a present dispute or the potential for a future dispute which meant that the ‘without prejudice’ rule applied.
  • There do not need to be legal proceedings for the parties to be in dispute, nor does an employee need to mention that they are minded to bring a particular claim such as discrimination or unfair dismissal.
  • ‘Unambiguous impropriety’ is a very narrow concept. The fact that Nomura would be disadvantaged by the exclusion of the ‘without prejudice’ correspondence did not mean that the ‘unambiguous impropriety’ exception applied. There would need to have been something more such as Mr Portnykh actually perjuring himself while giving evidence at the Tribunal and the ‘without prejudice’ correspondence being evidence of that perjury.

What does this mean for employers?

The ability for employers to have discussions with employees to end the employment relationship has been made easier by the introduction of ‘protected conversations’ last year (referred to in a previous blog). However, the protection afforded by ‘protected conversations’ applies only to ordinary unfair dismissal cases, not discrimination claims or unfair dismissals where whistleblowing is alleged. Employers do, therefore, still need to bear in mind the rules about when ‘without prejudice’ conversations may take place. Fortunately, as the EAT made clear in Portnykh, those rules are relatively liberal. Despite that, though, an ‘out of the blue’ approach to an employee with a settlement offer where there is nothing to suggest an actual or potential dispute is still unlikely to attract ‘without prejudice’ protection and it may be necessary for an employer to fall back, where possible, on a ‘protected conversation’ in those situations. 

UK court rules employers not vicariously liable for employees who victimise whistleblowers

The UK Court of Appeal has ruled, in the case of NHS Manchester v Fecitt & Others, that an employer cannot be vicariously liable for acts of victimisation by its employees against whistleblowers. The Court also clarified the correct test for determining whether a worker has suffered a detriment on the ground of making a protected disclosure (ie. whistleblowing). The Court decided that to avoid liability under the whistleblowing legislation, the employer must show that the employee’s protected disclosure did not materially influence (i.e. more than trivially influence) the employer’s treatment of that employee.

The whistleblowing legislation provides protection in two ways. First, dismissal of an employee is automatically unfair if the principal reason for dismissal is that they have made a protected disclosure. Second, workers have a right not to be subjected to a detriment by their employer on the ground that they have made a protected disclosure. This case concerned the second of these protections. 

What happened in this case?

Mrs Fecitt and two of her colleagues raised complaints with Mrs Fecitt’s manager about a fellow employee, Mr Swift. They suggested that Mr Swift had been misrepresenting his professional qualifications to other members of staff at an NHS Walk-In Centre in Manchester. The complaints amounted to protected disclosures falling within the scope of the whistleblowing legislation. Mr Swift admitted that he had misrepresented his qualifications to his colleagues and apologised. As Mr Swift had not misrepresented his qualifications to the employer and had given assurances that he would not repeat his behaviour, Mrs Fecitt’s manager decided to take no action. Mrs Fecitt and her colleagues were not happy with the outcome and persisted with their complaint to successively more senior levels of management.

Relations within the Walk-In Centre deteriorated, with some members of staff siding with Mrs Fecitt and her colleagues and others siding with Mr Swift. Mrs Fecitt and her colleagues alleged that, as a result of raising their complaint about Mr Swift, they had been subjected to isolation and daily personal insults at work. Mrs Fecitt also alleged that she had received an anonymous telephone call in which the caller had threatened to burn down her house unless she withdrew her complaint against Mr Swift and a photograph of Mrs Fecitt has been displayed on Facebook which had caused her distress.

Management attempted to encourage the employees at the Walk-In Centre to work together, but without success. Eventually, Mrs Fecitt and a colleague were relocated while another colleague was no longer offered shifts at the Walk-In Centre, as management believed this was the only way to resolve the conflict at the site. 

Mrs Fecitt and her colleagues complained to an Employment Tribunal that they had been subjected to a detriment on the ground of having made a protected disclosure.

The Employment Tribunal rejected the Claimants’ complaints. It accepted that the Claimants had made protected disclosures and had been subjected to a detriment by their colleagues. However, it did not consider that the actions of NHS Manchester or its failure to act constituted a detriment on the ground that the Claimants had made a protected disclosure.

The Claimants alleged that management had failed to take proper steps to prevent victimisation, but the Tribunal disagreed, saying that a reasonable amount of pro-active engagement by NHS Manchester with a view to preventing such a situation continuing was required and NHS Manchester had provided that. The Tribunal said that although the employer was open to criticism for not protecting the Claimants more effectively than they did, their failure to act more robustly was not deliberate and was not because of the protected disclosure that had been made.

As regards the redeployment/ceasing to provide shifts, the Tribunal said that NHS Manchester acted in the way that it did because it appeared to management to be the only feasible method of resolving the breakdown in the working relationships in the Walk-In Centre. The employer had not acted in the way that it did on the ground that the employees had made protected disclosures.

The Employment Appeal Tribunal (“EAT”) overturned the Tribunal’s findings. The EAT said that, in order to escape liability, NHS Manchester would need to show that their actions/alleged failures to act were “in no sense whatsoever” on the ground that the Claimants had made a protected disclosure. As the Employment Tribunal had not applied the correct test, the matter was sent back to the Tribunal to make a determination using that test. Additionally, the EAT found that NHS Manchester was vicariously liable for the victimisation carried out by its employees against the Claimants. 

On appeal, the Court of Appeal restored the Tribunal’s decision.

In relation to the allegations regarding redeployment/ceasing to provide shifts and failure to act to prevent the victimisation and whether these actions/failures were “on the ground” that the Claimants had made a protected disclosure, the Court of Appeal held that the Tribunal had applied the right test. The Tribunal was clearly satisfied that the reasons given by NHS Manchester for doing what it did were genuine, and the fact that the Claimants had made protected disclosures had no influence on its decisions. It agreed with the Tribunal’s reasoning and ruled that the proper test was whether NHS Manchester had shown that the Claimants’ protected disclosures had not “materially influenced” (in the sense of being more than influenced to a trivial extent) the employer’s treatment of them. 

The Court of Appeal also overturned the EAT’s decision on vicarious liability. It found that because there is no provision making it unlawful for employees to victimise whistleblowers, then since the employees who had allegedly victimised the Claimants could not themselves be personally liable under the whistleblowing legislation, NHS Manchester could not be vicariously liable for their conduct. 

What does this case mean for employers?

It will be welcome news to employers that they cannot be held to be vicariously liable for their employees’ acts of victimisation against whistleblowers. However, this does not mean that employers can get away with turning a blind eye to this type of situation. While an employer may not be vicariously liable for its employees’ acts of victimisation against whistleblowers, it can be vicariously liable under other legislation such as the Protection from Harassment Act. Furthermore, an employer that does not do enough to prevent an employee being victimised by other employees for blowing the whistle can itself be liable if its failure to act can be shown to be on the ground that the employee has made a protected disclosure. In this case, the Tribunal considered that the NHS Manchester had done enough. If, however, the fellow employees who victimised Mrs Fecitt had been individuals to whom she had directly or indirectly reported, the outcome could have been different, as their actions in that event could have been held to be actions of the employer itself.   Also, a further point is that an employee who feels sufficiently aggrieved by an employer’s actions in a whistleblowing situation may argue that the employer has acted to destroy the relationship of trust and confidence and bring a claim for constructive unfair dismissal.

Public Concern at Work, the whistleblowing charity has now called for a Government review of the legislation to ensure that whistleblowers are protected in situations such as those which arose in this case. It is concerned that if an employer does not do enough to protect staff from retaliation, then workers may stay silent rather than blowing the whistle in the public interest. In the NHS, where this has been a particular problem of late, the Department of Health has announced changes for early 2012 to ensure that NHS staff will receive greater support if they raise concerns.