Can settlement agreements be used as an alternative to redundancy consultation?

We find ourselves navigating difficult times. Many businesses are struggling with the impact of lockdown and there has been a general downward trend in both the business to business market and business to consumer market. Owners, managers and directors are looking at ways to streamline their businesses to get through this period and come out the other side . In some cases, changes to staff levels are simply to survive a difficult period but for others this has been an opportunity to reflect on staffing requirements.

When a redundancy situation arises, the employer will usually commence a full redundancy consultation process with affected staff. When there is a genuine redundancy situation, employers do not need to be scared of the process to be followed before making an employee redundant. Such steps are sometimes required, and hard decisions have to be made.

The full redundancy process can take time and leaves the business with the uncertainty of whether a former employee will bring a claim (with merit or not). Many businesses will therefore be looking to offer those staff at risk of redundancy a settlement agreement (which used to be called compromise agreements).

A settlement agreement is an agreement within which an employee or worker agrees not to pursue certain claims against their employer. The agreement will document the terms of the employee’s departure from the business. The employee will usually receive a payment (which is typically enhanced compared to what they would otherwise receive if they were made redundant) in return for waiving their rights to bring claims against their former-employer. This will include claims for unfair dismissal and discrimination which could have arisen during the redundancy process.

As an employer, it is important that the document is properly drafted as there are very strict requirements for a settlement agreement to be valid. Employers also need to consider the value of avoiding having to go through a formal process and to have the certainty of not having a claim from the departing employee land on their desk months later. The amount offered typically has to be more than the statutory redundancy payment as employees would get that if they went through the full consultation process and were made redundant without waiving their right to bring a claim.

For an employee, consideration needs to be taken as to whether the offer is reasonable and whether they are prepared to waive their right to bring claims. Employees must receive independent legal advice for an agreement to be valid and the employer typically pays for the employee to take this advice. The adviser will explain what the terms of the agreement mean and what rights are being waived by signing the agreement. Employees should ensure that they understand what they are signing and what they are giving up before signing.

Advice should be taken by employers before offering an agreement as there are situations (for example when looking to make more then 20 staff redundant) where it may not be appropriate and there are certain claims that cannot be waived. Care also needs to be taken as to how the agreement is offered, in case the employee says no. However, with certainty of cost being key for employers at the moment and with many busy business owners and directors not having the time to go through a formal consultation processes with employees, a settlement agreement is an alternative that many employers are going to want to use.

There is further guidance for employees on settlement agreements here and further guidance for employers here.

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