Settlement agreements in the redundancy process

Key takeaways:

• Settlement agreements can save employers from employment tribunal, which reduces cost, time and the potential for reputational damage.
• As an employer, you should consider whether, how and when you should offer settlement agreements during the redundancy process.
• Many employers make settlement offers before or during the early stages of the consultation process, as an alternative option.
• Employers should also consider taking specific legal advice before deciding whether to offer a settlement agreement in any particular circumstances.

Settlement agreements are an increasingly popular method by which employers can terminate the employment relationship on agreed terms and ensure this does not lead to employment tribunal claims.

This is no different in the redundancy context, where employers commonly offer settlement agreements to affected employees to avoid the risk of unfair dismissal claims. These claims could arise where employees dispute their roles are redundant and/or allege their employer has followed an unfair procedure.

However, employers should carefully consider whether, when and how they offer settlement agreements during the redundancy process, considering that employees are under no obligation to accept them. In fact, there is a risk that poorly conducted settlement discussions could exacerbate the likelihood of claims and the strength of those claims where the discussions are admissible in evidence.

Whether to make a settlement offer

Settlement agreements can have many advantages for employers. Most importantly, they will protect them from employment tribunal claims, saving the time, cost and potential reputational damage associated with such proceedings.

They also allow the parties to agree other exit arrangements, such as confidentiality obligations, references and internal/external announcements.

However, settlement agreements come at a cost. There is no incentive for employees to accept settlement agreements which simply restate their legal and contractual entitlements. Therefore, employees will expect an enhanced amount, usually several months’ salary, before agreeing to waive their right to bring claims. Employers are also expected to cover employees’ legal fees in taking advice on the settlement agreement terms, which is necessary for it to be binding.

Therefore, it is ultimately a business decision whether to offer settlement agreements, weighing up the likelihood and possible value of claims against the cost of making enhanced payments.

For this reason, employers who are confident they have acted fairly in a redundancy process may choose not to consider settlement. On the other hand, some employers may offer settlement agreements to all affected employees as a precautionary measure, whereas other employers may only offer them to employees who have expressed discontent or threatened to bring claims.

When to make a settlement offer

In the redundancy context, another potential advantage of settlement agreements is that they can avoid the need to conduct a full consultation process, which can be time-consuming and stressful for both sides. Therefore, many employers make settlement offers before or during the early stages of the consultation process, as an alternative option.

However, this naturally means that any employees who accept the offer will not see the consultation process through to its end. This could be problematic if, for example, an employer offered settlement agreements to all affected employees but was only seeking to reduce the number of them performing a role.

It also means that they cannot be considered for alternative vacancies which may have been suitable had their current role been made redundant. On a practical level, some employees are likely to resist settlement discussions at this stage, instead preferring to conclude the consultation process in the hope they may retain their employment.

For these reasons, in some cases, it may be more appropriate to wait until the consultation process has ended – and it has been decided whether and which roles will be made redundant – before making settlement offers to the dismissed employees.

How to make a settlement offer

In certain circumstances, settlement discussions can be kept ‘off the record’, meaning they cannot be disclosed to an employment tribunal even where the employee brings a claim. This will be the case where the offer is made on a ‘without prejudice’ basis or as part of a ‘protected conversation’.

In order to be ‘without prejudice’, the offer must relate to a pre-existing dispute and amount to a genuine attempt to settle it. This might apply where an employee has raised concerns over the redundancy proposals/process, but not where their employer has placed them at risk without hearing their response.

A ‘protected conversation’ does not require there to be a pre-existing dispute.

However, they are admissible in discrimination proceedings, so would lose their value where the employee did not accept the offer and subsequently linked their dismissal to a protected characteristic, such as a disability. In addition, a conversation will lose protection where the employer engages in ‘improper behaviour’, such as placing undue pressure on the employee to accept it.

Therefore, it is important that employers consider which route is more appropriate in the circumstances and they do not attempt to make a settlement offer on an open, unprotected basis.

Summary

Overall, settlement agreements can be an effective way for employers to avoid claims arising from redundancy processes. However, employers should carefully consider the wider circumstances to ensure they are appropriate, effective and, even if unsuccessful, non-disclosable. Employers should also consider taking specific legal advice before deciding whether to offer a settlement agreement in any particular circumstances.

Ethan Diver is a Solicitor at Taylor Walton Solicitors.

Read more

Employment tribunal: How to navigate the process – For employers and particularly SMEs, there is still some cause for concern and a need for increased awareness around the risks when dismissing individuals, Andy Shettle argues