Q: Can we use a settlement agreement in an individual redundancy situation?
Naomi Greenwood, a Partner specialising in employment law at Moore Blatch LLP answers.
You can! But whether it is advisable to do so is a much debated matter. There are two schools of thought as to whether it is a sensible approach to take. On the one hand a Settlement Agreement will provide you with the peace of mind that the individual cannot pursue claims against you in future. Others consider that this is just inviting more cost and begging the individual to question whether their redundancy is fair if they are being asked to sign away their rights.
What is a Settlement Agreement?
It is a formal agreement in which individuals agree to waive their employment claims against you. Having signed the agreement individuals are not able to bring claims in relation to any of the matters referred to in the document.
The agreement may also be used to clarify terms around termination such as notice, garden leave and restrictions on post termination competition.
A Settlement Agreement must fulfill strict statutory requirements in order to be valid and enforceable. This includes the individual having to receive independent legal advice on its terms. An employer will normally contribute towards the cost of the individual receiving such advice from a legal adviser.
In order to incentivise individuals to enter into its terms the agreement will usually offer a more generous payment that an individual’s strict legal entitlement.
Is there a fair reason for dismissal?
Employees can be fairly dismissed if the reason for the termination is:
Statutory restriction; or
Some other substantial reason.
Under the Employment Rights Act 1996 (“ERA 1996”) redundancies can arise in one of three situations:-
The employer ceases or intends to cease carrying no the business for the purposes of which the employee was employed by it (business closure)
The employer ceases or intends to cease to carry on that business in the place where the employee was so employed (workplace closure)
The employer has a reduced requirement for employees to carry out work of a particular kind or to do so at the place where the employee was employed to work (reduced requirement for employees).
In the event of a redundancy an employer is obliged to carry out a procedure that is fair and reasonable in the circumstances, taking into account the employer’s resources. In order to be fair that procedure must involve meaningfully consulting with staff in order to try to avoid having to dismiss. This will include consideration of alternative roles they may be able to take up within the business.
How can employers benefit from offering Settlement Agreements?
If you have a redundancy situation and redundancy is a fair reason for dismissal then you might wonder why a Settlement Agreement is necessary.
There may be a number of circumstances where you consider that a full blown redundancy consultation process with all affected staff is not appropriate- perhaps because it is likely to be futile where there is clearly no alternative to dismissal- or where it is likely to result in unnecessary disruption to the wider workforce.
In these circumstances a lack of consultation will render the dismissal procedurally unfair but the use of a Settlement Agreement can enable employers to have an open and frank discussion with the individual at an early stage and avoid a protracted process.
Equally if employers are concerned that they are exposed to claims because of matters specific to that individual, the offer of a Settlement Agreement will provide a forum for any grievances to be raised and addressed at an early stage.
Or it may simply be the case that you would like to offer enhanced payments to your redundant staff and you consider it reasonable in return to expect staff to provide the reassurance that they will not claim against you in future. A Settlement Agreement can set out other reasonable conditions on which such enhancement will be paid and not clawed back, such as that the individual has not committed gross misconduct prior to the termination of their employment or will not immediately go to work to your main competitor.
Use with caution
Employers must go about the offer of a Settlement Agreement carefully and, ideally, on a “without prejudice” basis. If an individual agrees to this and understands what “without prejudice” means, then employers can speak frankly in the knowledge that such discussions cannot be raised by either party in future proceedings. Otherwise if discussions fail and an employer has to proceed with dismissal without a Settlement Agreement the employee may try to argue that their redundancy was prejudged and cannot therefore have been fair.