Avoiding Damaging Dismissals Through the Use of Settlement Agreements

  • Dispute Resolution
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"Can I have a Quiet Word?" Many of Peninsula’s clients believe that the procedures they have to follow to bring about an employee’s fair dismissal are laborious, stressful and time consuming.  Which is why the Government’s proposals for ‘confidential pre-termination negotiations’, that were introduced on Monday 29th July 2013, have been so widely welcomed. This is a very significant development. It introduces a new statutory framework that will allow certain discussions, between an employer and an employee, about an employee’s exit from the business, to be kept confidential from an Employment Tribunal, in the event that the employee subsequently brings a claim for unfair dismissal. Employers, who seek to use this new procedure, with Peninsula’s guidance and help, will be able to explore with one of their employees the idea of bringing their employment to an end, by agreement, in an open and frank discussion, without concern that this could be used against them in the event of a subsequent unfair dismissal claim.  There are, as one would expect, certain procedural safeguards, and employers will also need to follow the ACAS Code of Practice. Peninsula can readily advise employers about such matters. However, pre-termination negotiations will only be effective, and this ‘fast track’ will only work, in the event that an employer and an employee are able to agree the terms of an employee’s departure.  And once agreed, those terms will have to be set out in a Settlement Agreement (formerly known as a compromise agreement). But a Settlement Agreement is without doubt the best way of achieving a clean break between an employer and an employee:- It can resolve and prevent employment disputes.

  • It’s a useful tool if employers are looking to restructure their business or reduce headcount.
  • It gives the employee a guaranteed sum of money on departure.
  • It helps bring about the termination of an employee’s employment without the need to follow time consuming performance management procedures or acrimonious and adversarial disciplinary procedures.
  • It removes the uncertainly, worry and cost of Employment Tribunal proceedings.

Many of Peninsula’s clients often ask for guidance on the amount that should be paid to an employee, as part of these negotiations, in order to secure their exit from the business.  It is largely a commercial decision based on legal advice, but a number of factors are likely to be relevant:-

  • The value of any award, in the event of a successful claim for unfair dismissal
  • The extent of any contributory fault.
  • The employee’s potential redundancy entitlement.
  • The impact and disruption of a claim.
  • Setting a precedent and/or taking a stand.
  • Reputational damage and adverse publicity.
  • Monies outstanding from the employee(training fees/loans etc).
  • Notice period and garden leave.
  • ‘PILON’ and retention of benefits
  • Outstanding holiday entitlement.
  • Outstanding bonuses and commission.
  • The relaxing/tightening up of restrictive covenants.
  • A reference.
  • Confidentiality.
  • Payment by instalments.

Best practice dictates that employers should, in this scenario, agree with the employee the termination date; calculate and agree their contractual entitlement up to that date (salary/benefits/holiday/PILON etc) and then agree a figure (and payment plan) to be paid on departure, in full and final settlement of any Employment Tribunal claims that an employee might be able to bring.  Inevitably there are certain legal requirements that employers must observe, and which Peninsula can advise on, when drawing up settlement agreements.  Significantly and most importantly of all, the employee must have received advice from an independent legal advisor before the agreement is concluded. And although Peninsula can provide advice to employers on the terms that should be included in Settlement Agreements, common clauses inevitably will include (1) obligations of confidentiality, (2) a no disparaging comments clause, (3) a warranty and (4) a clause confirming that the payment is accepted by the employee in full and final settlement of all outstanding Employment Tribunal claims. There are also tax implications that employers need to be mindful of.  As a general rule, all payments received by an employee under a Settlement Agreement will be taxable, either as employment income (payment up to termination; salary, holiday pay, PILON etc) or, as a termination payment in so far as it exceeds £30,000 (payment on termination). Unless it is being paid in settlement of a claim for injury to feelings. Whilst employers will need to think very carefully about the risks of engaging in these negotiations, and the impact it is likely to have on their on-going working relationship with an employee, particularly if agreement cannot be reached, this is undoubtedly an welcome development, given that Peninsula have first-hand experience when advising their clients, on just how damaging dismissals can be. By Mark Owen

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