No fault dismissals dismissed in favour of settlements

The government has now dropped its proposal to enable micro businesses – which employ less than 10 people – to make compensated no-fault dismissals.

As the Enterprise and Regulatory Reform Bill was given its second reading in the House of Commons, Business Secretary Vince Cable provided a “categorical assurance” of the government’s stance on the proposal.

Furthermore, a clause on voluntary settlement agreements will be added to the Bill in place of the one regarding no-fault dismissals when it reaches the next stage.

These simplified versions of the compromise agreements currently in place enable employers to offer under-performing employees a payment in return for leaving the company, avoiding costly employment tribunals.

Should the member of staff decline the offer made, it could not be used as evidence in unfair dismissal tribunal cases.

The government hopes that simplifying these agreements will result in them being used by more employers, especially in smaller businesses.

“Settlement agreements are smart, fair and pro-business reforms which deliver results for employees and employers,” said Mr Cable. “It empowers employers by enabling them to keep their workforce flexible and encouraging alternative ways of resolving workplace problems rather than resorting to a tribunal.

“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.”

However, there are a number of questions that remain unanswered regarding the requirements of such agreements. We should know more when the government launches a consultation this summer on guidance for using settlement agreements, which will include draft letters and model templates.

In the meantime, for more information and advice, please contact Lara Murray at


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