Settlement agreement instead of redundancy?

As an alternative to redundancy dismissal, employers will often consider using settlement agreements to bring affected employees’ employment contracts to an end. Terminating employment through a settlement rather than redundancy means the employer does not have to follow the full redundancy process and removes the associated risk of tribunal claims.

A settlement agreement can often be a much quicker and more cost-effective way to formally and lawfully terminate an individual’s employment, while allowing the employee the opportunity to negotiate better terms, such as a higher settlement fee than the level of statutory redundancy pay they would otherwise be entitled to.

This guide is for employers using settlement agreements within redundancy scenarios. We explain the statutory rules relating to the validity and enforceability of settlement agreements, and the types of terms to be considered in the context of redundancies to ensure your settlement agreement is effective.

What is a settlement agreement?

A settlement agreement is a legally binding document between an employer and employee that is designed to settle any claims that arise out of the employment relationship.

In the context of redundancy, a settlement agreement is specifically designed to terminate that relationship on mutually agreed terms.

Under section 111A of the Employment Rights Act 1996, any evidence of pre-termination negotiations is inadmissible in any legal proceedings before an employment tribunal for unfair dismissal.

As such, discussions or offers before termination of the contract of employment will be on a “without prejudice” basis where exit terms are being agreed between the employer and the employee.

The “without prejudice” principle is founded in common law and prevents statements, either in writing or orally, made in a genuine attempt to settle an existing dispute, from being put before a tribunal as evidence. Save except for section 111A of the ERA, any “without prejudice” confidentiality would not apply where there is no existing dispute between the parties. As such, this statutory provision is intended to provide flexibility when using confidential discussions to bring the employment contract to an end.

Consequently, most pre-termination negotiations can be treated as confidential, even in circumstances where there may be no current dispute or where any of the parties are unaware that there may be an employment problem. In particular, employers can openly offer and discuss settlement agreements with affected employees in the context of redundancy.

Settlement agreement during redundancy: key considerations

There are various rules relating to settlement agreements in the context of redundancy, not least that to be valid and enforceable the agreement must satisfy certain statutory requirements. In particular, for a settlement agreement to be legally valid, the following conditions must be met:

• The settlement agreement must be in writing
• The agreement must relate to a specific complaint or to particular proceedings, stating the nature of the claim(s) that it is intended to cover, eg unfair dismissal
• The employee must have taken independent advice on the terms and effect of the proposed agreement, as well as its effect on their ability to pursue that complaint or proceedings before an employment tribunal
• The employee’s chosen independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim by the employee in respect of loss arising from that advice
• The agreement must identify the independent adviser
• The agreement has to confirm that all of the statutory requirements regulating the settlement agreement have been satisfied

The independent adviser will either need to be a qualified lawyer, a certified and authorised official, a member of an independent trade union, or a certified and authorised advice centre worker. Further, the adviser must not be employed by, acting for, or connected with the employer or their organisation.

Where an employer is offering a number of employees a settlement agreement, all of whom will require independent legal advice, they can direct employees to a single firm of solicitors to help streamline the process, provided the firm is not in any way associated with or acting for the employer.

When dealing with a collective redundancy, ie; where 20 or more employees may lose their jobs within a 90-day period at a single establishment, the employer must also comply with special collective consultation rules.

In the event of a redundancy situation an employer is obliged to carry out a procedure that is fair and reasonable in the circumstances. This must involve meaningful consultations with any affected employees.

However, where a settlement agreement has been reached and the employee accepts the termination of their employment, this avoids the need to carry out a lengthy and often complex consultation process. It is also an effective way of minimising the risk of future claims for unfair dismissal before the employment tribunal, together with any adverse publicity that this may attract.

Any pre-termination discussions surrounding a settlement agreement can be carried out in a confidential manner, meaning that it does not need to affect the morale of the wider workforce, and even where agreement cannot be reached, any such discussions are unlikely to fall under the scrutiny of an employment tribunal if the employee subsequently lodges a complaint for unfair dismissal.

Are settlement agreement redundancy discussions confidential?

In order to ensure that any pre-termination negotiations remain confidential, there must be no improper behaviour associated with either the offer or discussions in relation to a settlement agreement.

In short, where the matter comes before an employment tribunal in a claim for unfair dismissal, and the tribunal finds that there has been improper behaviour, anything said or done in pre-termination negotiations will only be inadmissible as evidence to the extent that the tribunal considers it just.

That said, evidence of improper behaviour, does not necessarily mean that an employer will lose any subsequent claim that is brought against them, although they run the risk of losing any statutory protection afforded by section 111A.

What constitutes improper behaviour is ultimately for a tribunal to decide based on the facts and circumstances of each case. This includes, but is not limited to, behaviour that would be regarded as “unambiguous impropriety” under the common law “without prejudice” principle.

By way of example, this could cover any of the following forms of conduct:

• All forms of harassment, bullying and/or intimidation, either through offensive words or aggressive behaviour
• Physical assault, or the threat of physical assault, and any other criminal behaviour
• Putting undue pressure on a party, for example, by not giving an employee reasonable time to consider a settlement offer or threatening dismissal if a settlement proposal is rejected
• All forms of victimisation
• Any discrimination by reason of age, disability, sex, sexual orientation, gender reassignment, pregnancy and maternity, marriage and civil partnership, race, religion or belief

Moreover, where unlawful discrimination occurs during a settlement discussion, this may itself form the basis of a claim to an employment tribunal.

How to raise the issue of a settlement agreement

Given that a settlement agreement redundancy context is designed to bring the employment relationship to an end on mutually agreed terms, an agreement can only be reached through a process of discussion and negotiation.

As a matter of law, settlement agreements are entirely voluntary and, as such, employees do not have to agree to them or enter into discussions about them if they do not choose to do so.

Equally, an employee does not have to accept any terms initially proposed to them, where there may be offers and counter-offers from both sides, either during a single meeting or a series of meetings. The parties may even accept at the end of these discussions that agreement is not possible.

However, where agreement can be reached, this will be based on the basic premise that the employee will waive their rights to bring a claim for unfair dismissal in return for some form of financial payment. When deciding on the level of payment to offer, in order to incentivise an employee, you may need to consider an enhanced redundancy payment. In other words, to enable you to reach a settlement agreement, you may need to make a more generous pay-out than that to which the employee would be statutorily entitled.

In contrast, however, you must be careful not to place undue pressure on an employee to accept an offer that is too low, or indeed any offer of settlement, for example, through any suggestion or threat that their dismissal is a foregone conclusion and, in consequence, or otherwise, they have no choice but to sign.

That said, it is still open to you to set out in a neutral manner the reasons that have led to the proposed settlement agreement. It is also acceptable to factually state the likely outcome if an agreement is not reached, namely, that the employee may be made redundant in any event, albeit on less favourable terms.

A proposal for a settlement agreement can be made at any stage during the course of an employment relationship. It can also be made verbally or in writing, although putting an offer in writing can help prevent misunderstandings.

Once an offer has been made, the employee should be given a reasonable period of time to consider the proposed settlement, although what constitutes a reasonable period will depend on the circumstances of the case. Generally speaking, unless agreed otherwise, you should allow a minimum of ten calendar days for an employee to consider the terms and to take independent legal advice.

Further, although there is no statutory right for the employee to be accompanied at any meeting to discuss a proposed settlement agreement, as a matter of best practice employers should allow that individual to be accompanied. The employee may benefit from the support of a work colleague, or trade union official or representative. This may also help to progress settlement discussions.

Terms to include

A settlement agreement in the context of redundancy is typically a lengthy document containing various clauses relating to the termination of the individual’s employment, as well as the waiver of their right to bring a claim for unfair dismissal, in return for a discretionary severance payment.

First and foremost, therefore, the terms of this agreement must make it clear that any claim for unfair dismissal will no longer be possible. It will not be sufficient to simply state that the agreement is in “full and final settlement of all claims”. To be legally binding, a settlement agreement has to specifically state the claim(s) that it is intended to cover.

Secondly, the details of any settlement payment due to the employee, and when such payment will be made, should be included in the agreement, as well as when the individual’s employment will terminate. The employment can be brought to an end either with the required contractual notice or, alternatively, by a date specified in the agreement.

Additionally, it may be worth considering whether you would like to include any terms to protect the reputation of your organisation post-termination. In particular, the use of confidentiality clauses can prevent employees from disclosing the details of the agreement to third parties, and non-derogatory comment clauses can stop the employee from making disparaging remarks.

The reaffirmation of any restrictive covenants contained within the contract of employment can also help to protect the interests of your business by restricting an employee’s post-termination activities for a specified period of time.

By way of statutory requirement, the agreement should include confirmation from the employee that they have received advice from an independent adviser as to the terms and effect of the agreement, including its effect on their ability to present any claim before an employment tribunal or other court.

Further, given that it is customary rather than mandatory for an employer to pay for the employee’s legal expenses, there should be reference as to who will be responsible for the cost of this advice.

Finally, although the above suggestions are by no means exhaustive, the agreement must identify the legal adviser who has been responsible for the provision of the relevant advice, and confirm that the agreement meets all of the statutory requirements.

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.