Redundancies set to drive surge in Settlement Agreements

When the furlough scheme is finally phased out, it is inevitable that redundancy-related dismissals will be unavoidable for many employers as they face tough trading conditions and difficult decisions in the coming months.

According to experts, this trend will lead to an increase in the use settlement agreements, as businesses across a range of sectors look to reduce the risk of tribunal claims, especially if something has gone wrong during the redundancy process.

A settlement agreement is a legal contract between the employer and employee that some businesses are utilising when making workers redundant. Typically, a settlement agreement will offer the employee an enhanced redundancy package, allowing them to receive a payment higher than their contractual entitlement.

In return, the employee agrees not to pursue against the employer, any claims they believe may have arisen during their employment, its termination or the indeed the redundancy process.

How can it help?

Given the scale and speed with which many businesses will act, the potential for costly mistakes is huge and settlement agreements are a viable tool to resolve some of the challenges presented.

Although businesses will hope for a straightforward and amicable split from employees being made redundant, it’s impossible to guarantee every redundancy will proceed without dispute, especially given the ongoing uncertainty surrounding the pandemic.

Naturally, the redundancy process can come with a lot of mixed emotions from both parties, so a settlement agreement will ensure you part company on certain agreed terms.

Under these terms, employees will waive their right to bring any claims against their employer, which will save any long-running and unwanted legal disputes.

Not only this, but settlement agreements ensure employees receive a fair financial package, higher than they usually would, which given the ongoing economic uncertainty, could make a big difference to their own personal situation.

It is important to note however that a Settlement Agreement cannot compel an employee to waive their right to claim for any personal injury which the employee was not aware of at the date of signing of the agreement.

Agreeing neutral terms

In some cases, there may have been a past incident that although addressed and resolved at the time, could resurface if the employee in question feels aggrieved at the prospect of redundancy.

In this situation, the business may feel it’s necessary to use a settlement agreement to avoid the potential of a costly employment tribunal, where there’s a risk the employee is awarded significant compensation.

However, before a settlement agreement can be arranged, its terms must be mutually agreed between the employer and employee and set out in the written statement agreement documents, identifying which claims the employee agrees not to pursue in exchange for the agreed payment.

These agreements should be customised for the specific employee and their individual circumstances, including a clearly expressed waiver of the specific claims.

With regards to the settlement payment, the agreement should also contain a clear breakdown of the payments which have been agreed and whether any of them are to be paid tax-free.

Most settlement agreements will include a confidentiality clause, which requires the employee to keep the terms of the agreement, the settlement amount and the reasons for the agreement confidential.

The costs involved

In terms of how much a settlement agreement may cost a business, there is no set scale of payments, as the amount of any settlement payment depends on the circumstances of each case.

There are several key factors to consider when deciding the amount, these include:

  • How long the employee has worked for the business
  • The circumstances around why they are being offered a settlement agreement
  • How long it would take to settle the dispute normally
  • The potential liability/cost of having to defend the claim at a tribunal

In addition to the cost of the settlement payment itself, it’s not uncommon for the business to cover or contribute to the individual’s legal costs, as they are required to seek independent legal advice on the terms of the agreement.

This statutory requirement, set out in section 203(3) Employment Rights Act 1996, states the legal adviser must be named in the agreement and have relevant insurance to cover the advice given.

This can vary between businesses, but the amount of this contribution is typically capped between £250 – £500, which should be outlined in a clause within the settlement agreement.

Moving forward positively

October’s deadline for furlough support will be a challenging time for employers and employees alike, especially as businesses face the difficult task of restructuring to cope with mounting financial pressures.

However, with question marks surrounding their long-term survival, businesses will have to make some tough decisions, including largescale redundancies, to weather the storm and protect themselves.

In order to move forward positively, it’s crucial that both parties have a ‘clean break’, and in some cases, this will mean relying on settlement agreements to ensure the best possible outcome is achieve for all parties.

If your business is considering redundancies as part of a wider restructure, then it’s important to contact a team of experienced employment lawyers, who will advise you on how to proceed safely and effectively.

by Tina Chander, partner, Wright Hasall

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