Settlement Agreements – is there another way?

Settlement Agreements are a useful tool for dealing quickly with poor performing or troublesome employees, says Catherine Greig, Director of Greig Employment Law. But there are pros and cons to consider …

Settlement Agreements are a useful tool for dealing quickly with poor performing or troublesome employees. But should they be an employer’s default position? When is it better for a business to spend time following its internal procedures?

The benefits of a short sharp exit. 

Settlement Agreements HR employers situation
Catherine Greig, Director and Owner of Greig Employment Law.

Time. The benefits of bypassing lengthy internal procedures are obvious. The need to tie up managers in investigations, report writing, hearings and appeals disappears. Instead, managers can continue to spend their time on core business activities and the problem of an unproductive or difficult employee disappears.

Good for the employee. There will often be advantages for the employee too. Cash is received quickly, the risks associated with litigating disappear, references and announcements can be agreed and the stigma of a dismissal can be avoided.

Control. The employer retains control of the timing and the costs, and can also take the opportunity to restate or update confidentiality clauses and post-termination obligations.

Normally, to reach a mutually agreeable settlement, an enhanced payment of some sort will be offered. This needs to be pitched at a level to make an employment tribunal claim unattractive. This upfront cash spend for the employer is balanced out by the advantages set out above.

The advantages of formal procedures.

Sometimes if there is a real risk of the employee causing damage or loss to the business, immediate exit with a Settlement Agreement is entirely appropriate.

But might you be missing something? Consider the following benefits of following your internal procedures.

Missing underlying problems in the business?

Following an internal procedure will give the employee an opportunity to explain their position. This might reveal a business-related reason for the underperformance or conduct. For example, does the on the job training need improved? Are the expectations of a manager unreasonable? Are the requirements of the role (the hours, the workload etc) reasonable?

If an employer is not aware of these issues, it can’t address them. Its business may remain less productive and the same problems may continue to arise.

Workplace morale and reputational issues.

There are two main ways in which ignoring internal procedures can affect the morale of the remaining workforce.

Firstly, it can lead to a perception that poor performers will always receive a payoff.

Secondly, a perception of a “tap on the shoulder” culture can quickly breakdown employee trust and goodwill. Any good work the employer is doing in investing in employee relations is quickly undone.

There is also the general issue of fairness. Most employees (whether exiting or remaining) are likely to feel that bypassing a fair internal procedure and going straight to an exit simply isn’t a “fair” thing for the employer to do.

If the employer is attempting to portray a certain image (internally or externally) this can damage the employer’s reputation.

Costs of recruitment and retraining

An impatience to get rid of employees quickly might increase the costs to the business in the long term. While management time spent disciplining or managing may seem unproductive in the short term, the longer term costs associated with recruiting and replacing staff are often overlooked. Also add in the loss of experience and customer relationships. While it may seem like lost time initially, the potential for solving a disciplinary issue or investing in a poorly performing employee may be more cost effective in the long term.

If an employer is not planning to recruit a replacement, that should send warning signals that this may in fact be a redundancy situation.

The worst case scenario  

A serious risk of bypassing procedures is that the employer misses a potential discrimination situation, or situation which might lead to an automatically unfair dismissal.  The employer is much less likely to be in full possession of all facts if it hasn’t followed any internal procedure.

No doubt the employer, when planning its settlement figure, was contemplating avoiding an ordinary unfair dismissal claim. If there is now the potential of a claim with uncapped compensation, the chances of an agreed exit at that original offer are slim.

As a result it is very important that the HR professional (or a senior manager) thoroughly scrutinises the reasons given for needing an immediate exit. This should also involve making sure that there is no information in the manager’s possession that hasn’t yet been shared that might be relevant.

Poor performance or conduct issues may indeed exist, but what if the employee has recently revealed to the manager in confidence that he has been diagnosed with depression?   Or has recently questioned the manager’s safety procedures or tried to assert a statutory right?   A prudent employer needs full information so that it can properly assess risk.

Exceptions to confidentiality of pre-termination discussions.

Remember that there is an exception to the confidentiality of settlement discussions under section 111A of the Employment Rights Act 1996. Claims of discrimination, harassment and victimisation under the Equality Act 2010 are not covered by the confidentiality provisions set out in s111A. The same applies to claims that are automatically unfair, such as whistleblowing or asserting a statutory right. Any improper behaviour by the employer during the negotiations (bullying or intimidation for example) may also result in confidentiality being lost.

An employer might still be able to rely on the common law “without prejudice” principle but this will only apply if there was a pre-existing dispute. It is unlikely to apply if the employer has initiated exit  discussions out of the blue.

Conclusion

There will be situations where it is appropriate to bypass procedures and move straight to a negotiated exit. However making this your default position can damage morale and be less cost efficient in the long run. The most immediate risk however is that you may not be in full possession of the facts. This might result in an employee in a much stronger negotiating position than expected and exposure to a much larger liability than anticipated.

As a minimum, consider starting an internal procedure and offering a settlement agreement once you are satisfied that you have all the relevant facts. Also make sure you are fully familiar with the ACAS Code of Practice on Settlement Agreements.

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