Many employers are unaware of the term ‘settlement agreement’ – until matters of furloughs and redundancies occur. To survive economic impacts, restructuring within the workforce is unfortunately inevitable.
Employers must lawfully exercise the best method when terminating employment contracts. Settlement agreements can make the journey towards redundancy easy, for both employer and employee.
Read how employers can create, negotiate, and deliver settlement agreement offers for their workforce.
What is a settlement agreement?
A settlement agreement (or compromise agreement) is a legally binding contract, which brings employment contracts to an end. Severance payment is provided to the employee in question. In exchange, the employee often waives any claims and dismissal grievances.
The employer and employee begin discussions for settlement terms. They both must agree to the negotiations. After which, contracts must be documented and signed to be considered legally binding.
As settlement agreements are legally recognised, employees must seek prior legal advice. They can request legal aid from an independent consultant, like an employment solicitor, before agreeing to sign the proposal.
This exit method ensures both parties equally consent to termination decisions. Employee welfare is considered greater this way than through redundancy. Thus, minimising impact on business development.
Is a settlement agreement the same as redundancy?
Settlement agreements are not the same as redundancy. It’s often used as part of the redundancy process. It protects employers from claims of contract breaches. Employees also benefit from an enhanced redundancy settlement agreement.
When should I use settlement agreements?
Settlement agreements aren't just used at the end of employment. They can also be used to settle work disputes that occur mid-contract.
Employment advisers ACAS state you should resolve employment terminations internally. Used as a last resort, the procedure can be time-consuming, expensive, and disruptive for businesses. However, some employers find comfort in protection from unexpected contract breaches.
Settlement agreements can be used for group redundancies. For individual cases, employers are met with an array of reasons. From work performance, disciplinary issues, personal injury, to being unable to work due to sickness.
Discussing employment terminations
It’s always difficult to discuss employment termination. But having moral and legal understandings of the procedures can minimise business disruption.
Employers should formally discuss employment termination with the employee. Following this, negotiations for the settlement proposal can be drawn up.
Under employment law, settlement agreement discussions must be protected. Employers should mark all settlement documents as ‘without prejudice’ to apply legal protection.
The ‘protected conversations’ policy allows employers to initiate conversations about employment termination. Improper conduct (like pressuring employees, distorting situations) can result in losing protection. Employees may use such discussions as legitimate evidence for unfair dismissal, discriminatory grounds, etc.
What should be included in a settlement agreement?
Naturally, every business will have its own template. Terms and conditions are based on individual cases.
However, a standard settlement agreement negotiation can include:
- Notice payment and holiday entitlements
- Contractual bonuses and shares
- Ex-gratia or compensation payments
- Relevant NDAs (Non-Disclosure Agreements)
- Post-Employment Notice Pay (and any tax indemnities)
- Internal restructures (like resignations, handovers, returning company property
- Any legal costs included
- Agreements discussed by both employer and employee
To try to avoid dealing with grievances or settlement agreement counter offers, consider these factors:
- Ensure the employee has reasonable time to consider offers. (No less than 10 working days).
- Have clear terms documented in the proposal. Include details of payments, benefits, and notices agreed upon.
- Allow the employee to be accompanied by a colleague, legal representative, or trade union member during discussions.
- Remember the agreement doesn’t have to be classed as a dismissal. Termination can be considered ‘by mutual agreement,’ depending on your situation.
Include any owed entitlements like holiday pay, statutory redundancy pay, or PILON (payment in lieu of notice). This will help employees establish themselves financially whilst getting a job after a settlement agreement procedure.
Settlement agreement tax or compensation is normally free of tax and National Insurance contributions (for up to £30,000). However, it’s advised to seek financial advice on the matter before agreeing to anything.
Using ACAS settlements procedures
Employees can express several grievances for a settlement agreement offered. They can refuse based on the context of ill-health, choosing redundancy, or even accept alternative employment.
They can also choose to settle termination procedures independent of their workplace. The ACAS code of practice on settlement agreements allows unbiased procedures when resolving claims. They can also conclusively sign on behalf of the parties, validating the document.
Settlement agreement calculator ACAS -
Here are factors that can determine the value of a settlement agreement for employees:
- Length of service
This calculates an employee's statutory redundancy entitlement. The longer their working service, the greater the value of their claim.
- Length of Notice entitlement
Employees are paid for their notice if you do not have the ground to terminate employment immediately (i.e. for gross misconduct, etc).
These claims are great in numbers and are of higher value for mediation.
- Time needed to secure another job
Compensation may be granted depending on how long the employee takes to find a new job. Seek advice on this matter if unsure.
- Straight of claim
Offer the best commercial proposal to employees without affecting your business value.
- Employees’ attitude to settlement
Employees are more likely to agree to settlement agreements. Most prefer to take this route over initiating tribunal hearings.
Ensure that your employees are given a reasonable amount of time consider accepting settlement agreement offers.
Get expert advice on settlement agreements with Peninsula
You should consider all possible outcomes when proceeding with employment settlement agreements.
It’s important to support your employees through business restructures and redundancy periods. Strive for employee wellbeing, whilst minimising business productivity.
Our team of employment specialists at Peninsula can help you with advice on settlement agreements and redundancy procedures.
Peninsula clients get access to 24/7 HR consultation with our specialists or can secure air-tight contracts with our document experts. And if you’re not yet a client, you can still enjoy free advice from our experts. Simply call us on 0800 028 2420.