Settlement agreements are generally used by employers to settle potential employment claims, but they are also commonly used as an alternative to dismissal by redundancy.
Notwithstanding the reasons for making someone redundant, the employer must still follow a fair and lawful redundancy process. Using a settlement agreement in a redundancy situation can help to avoid a lengthy redundancy procedure, including meeting the relevant requirements to consult with those at risk of redundancy, ensuring fairness in selection and giving the requisite notice.
What is a settlement agreement?
A settlement agreement is a legally binding document between employer and employee to settle any claims arising out of the employment relationship. It is a written agreement, regulated by statute, in which an employee agrees to waive their right to bring certain tribunal claims, usually in return for a lump sum payment and a favourable reference.
These types of agreement are designed to document the terms upon which the parties to a workplace dispute have decided to resolve that dispute without recourse to litigation.
However, a settlement agreement can also be used in the absence of an existing dispute, for example, to bring an employee’s contract of employment to an end on agreed terms, with provision for the employee not to pursue any unfair dismissal or other tribunal claim.
How a settlement agreement can help in a redundancy situation
In the context of redundancy, a settlement agreement is specifically designed to terminate the employment relationship between employer and employee on mutually agreed terms.
A redundancy scenario will not always lead to, or be suitable for, a settlement agreement, where many employers may decide to dismiss an employee without any kind of exit package, save for any statutory notice and redundancy pay, where applicable.
However, many employers will offer settlement with an enhanced redundancy payment to save the time and expense of a lengthy redundancy process, to facilitate a ‘smooth’ exit from the business and to protect themselves from any future tribunal claims.
From an employer’s perspective, by using a settlement agreement and avoiding a dismissal by redundancy, you can fairly and swiftly bring an individual’s employment to an end without having to follow the normal redundancy procedures or providing the requisite redundancy notice period.
In this way, a settlement agreement can often be a quicker and more cost-effective way to formally and lawfully terminate an individual’s employment, even where the terms of the settlement agreement include an offer of an enhanced redundancy payment.
The use of a redundancy settlement agreement as an alternative to a compulsory redundancy process can also help to minimise the employer’s exposure to issues such as claims for unfair dismissal or adverse publicity and helping to maintain a positive employer brand and staff morale.
From an employee’s perspective, being open to proposals for settlement can help to minimise the uncertainty and stress involved in any redundancy process, including how much they will be paid and how much notice they will receive. Given that by signing any settlement agreement they will be waiving their right to bring any claim covered by the agreement, including unfair dismissal, there may also be scope to negotiate a more lucrative exit package when compared with any standard redundancy payout, together with a favourable reference.
Does the employee have to agree to the settlement agreement?
Settlement agreements, including redundancy settlement agreements, are entirely voluntary. This means that employees do not have to agree to any offer made by an employer or even to enter into discussions about the possibility of settlement.
Where an employee is willing to negotiate terms, there may be offers and counter-offers from both sides, either during a single meeting or via a series of meetings. At the end of these discussions, the parties may even accept that agreement is not possible.
Employers must also be careful not to place undue pressure on an employee to accept an offer of settlement, for example, by suggesting or threatening that their dismissal is a foregone conclusion or by otherwise implying that the employee has no choice but to sign.
What makes a settlement agreement valid?
There are strict statutory rules relating to the validity of settlement agreements. To be legally binding in waiving an individual’s right to bring a complaint or complaints before an employment tribunal, the following requirements must be met:
- The agreement has to be in writing
- The agreement has to relate to the particular complaint or proceedings that it is intended to cover, eg; unfair dismissal
- The employee must have had legal advice about the terms and effect of the agreement from a relevant independent adviser, as well as its effect on their ability to pursue a complaint or proceedings before a tribunal or court
- The independent adviser must have up-to-date professional indemnity insurance that covers the risk of any claim in respect of loss arising from the advice given to the employee
- The agreement has to identify who the adviser is
- The agreement has to state that the applicable statutory conditions regulating the settlement agreement have been satisfied.
The same strict statutory rules will apply to redundancy settlements agreements, including the requirement for employees to obtain advice from a qualified professional on the terms and effects of the proposed agreement.
Who pays for the settlement agreement legal advice?
Prior to signing a settlement agreement, an employee must receive legal advice about the terms and effect of the agreement from a qualified lawyer or other independent legal adviser.
While the employer is not legally required to meet any legal costs, they will usually agree to pay the reasonable costs of the employee in seeking legal advice on the settlement terms to help facilitate an agreement being reached.
However, the adviser must not be employed by or acting for, or otherwise connected with, the employer. Where an employer is seeking to reach a settlement with a number of employees to avoid a large scale redundancy situation, they can direct employees to a single firm of solicitors to help streamline the process and save on legal costs, provided the firm is not associated with or acting for the employer or their organisation.
Are settlement agreement negotiations confidential?
Under the Employment Rights Act 1996 (section 111A), most pre-termination negotiations will remain confidential in the sense that they will be inadmissible in any tribunal claim for unfair dismissal. This means that any offers made or discussions held will be on a “without prejudice” basis between the parties.
The common law “without prejudice” principle prevents statements made in a genuine attempt to settle an existing dispute from being placed before a court or tribunal as evidence. Section 111A was inserted into the ERA to allow greater flexibility in the use of “without prejudice confidentiality” as a means of ending the employment relationship where there is no existing dispute between the parties.
In this way, the employer and employee can talk freely without worrying that statements from their discussions could be used as evidence in a potential tribunal claim. The settlement agreement itself may also contain a confidentiality clause preventing the parties from discussing the terms of the agreement with any third party,
Are all pre-termination discussions inadmissible?
All pre-termination negotiations in a potential redundancy context will remain inadmissible, provided there is no improper behaviour associated with either any offers or discussions.
If the matter came before a tribunal and a finding was made of “improper behaviour” on the part of the employer, anything said or done in the context of settlement negotiations will only be inadmissible to the extent that the tribunal considers it just. This does not necessarily mean that any claim for unfair dismissal will succeed, although the employer may lose any statutory protection afforded by section 111A.
What constitutes improper behaviour is for an employment tribunal to decide based on the facts of each case. This includes behaviour that would be regarded as “unambiguous impropriety” under the common law “without prejudice” principle.
Common examples of improper behaviour could include:
- Harassment, bullying or intimidation, such as aggressive behaviour or offensive words
- Physical assault or the threat of assault, and any other criminal behaviour
- Discrimination or victimisation
- Placing undue pressure on a party, such as not providing an employee with enough time to consider a settlement offer or threatening dismissal if a proposal is rejected.
How long should an employee be given to consider an offer?
Once an offer has been made by an employer, the employee should be given a reasonable period of time to consider the proposed written settlement terms. The question of what constitutes a reasonable period will depend on the circumstances of the case.
Generally speaking, unless agreed otherwise, the employee should be allowed a minimum of 10 calendar days to consider the terms of any settlement agreement and to take independent legal advice from a qualified professional. This suggested timeframe is in accordance with the guidance given under the ACAS Code of Practice on settlements agreements.
Once the agreement has been signed by the parties, provided the agreement satisfies the strict statutory requirements, this will then be binding.
Following the redundancy process
All employers must follow the correct consultation rules and adopt a fair and objective selection procedure when making redundancies.
There are no prescriptive consultation rules for employers making up to 19 redundancies, although they must still discuss with an employee why they are being made redundant and any alternatives to this, such as taking any paid holiday entitlement or unpaid leave. When dealing with a collective redundancy, where 20 or more employees may lose their jobs within a 90-day period at a single establishment, there are special collective consultation rules.
This can significantly extend the period in which the process can be concluded, where the statutory minimum consultation period for between 20 to 99 redundancies is at least 30 days before any dismissals take effect. This is extended to 45 days for 100 or more redundancies.
Employers must also bear in mind that where employees sign settlements agreements and leave under voluntary redundancy or severance schemes, they may still need to be counted when deciding if the thresholds for collective redundancy rules have been met. The underlying reason for the ending of an employment relationship can still be classed as redundancy, even if a settlement agreement has been reached.
In either case, seeking expert legal advice is crucial to ensuring that the terms of any settlement agreement are acceptable, and the agreement itself is legally binding.
DavidsonMorris’ employment lawyers can help with all aspects of workforce management and planning, including redundancies, dismissals, settlements and contentious exits. Working closely with our specialists in HR, we deliver comprehensive advice on the options open to you as an employer and provide practical support through the redundancy process. For help and advice with a specific issue, speak to our experts.
Redundancy settlement agreement FAQs
Is a settlement agreement the same as redundancy?
Employers often use settlement agreements in a redundancy situation but they are not the same thing as redundancy. The effect of a settlement agreement is that the employee waives any right to go through a fair redundancy procedure or to bring any claim for unfair dismissal, typically in exchange for an enhanced redundancy payment.
Can my employer withdraw a settlement agreement?
Generally speaking, an employer can withdraw a settlement offer at any stage before a binding agreement has been signed by both parties. Once signed, the parties will be bound by terms of the agreement, including the payment of any negotiated lump sum under that agreement.
How do you negotiate a redundancy settlement?
It may be possible for an employer and employee to negotiate a redundancy settlement, in this way avoiding the time and cost involved in following a full and fair redundancy process. The terms agreed can then be incorporated into a written settlement agreement in which the employee waives any right to bring an unfair dismissal claim, although there are strict statutory requirements that must be followed.
What happens if you refuse to sign a settlement agreement?
If an employee refuses to sign a settlement agreement, a fair process must still be followed if the employer wants to bring their employment contract to an end, for example, by following a fair redundancy procedure. Any failure to follow a fair process will leave the employer vulnerable to any unfair dismissal or other tribunal claim that the employee may make.
Last updated: 17 September 2022