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LAW SCHOOL: Redundancies set to trigger surge in settlement agreements

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According to President of the Employment Tribunals, Judge Barry Clarke, there will be an increase in unfair redundancy claims when the furlough scheme is finally phased out.

This increase means that businesses, including small family-owned retailers, must consider using settlement agreements to mitigate the risk of tribunal claims, especially if something has gone wrong during the redundancy process.

A settlement agreement is a legal contract between the employer and employee that some businesses are utilising when making workers redundant. Typically, it offers the employee an enhanced redundancy package, and in return, the employee agrees not to pursue the employer, any claims they believe may have arisen during their employment.

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For small businesses, that lack the HR resources needed to oversee the redundancy process, these settlement agreements could save them from a long-running and unwanted legal dispute.

How can it help?

Given the urgency of the situation, many businesses will need to act quickly, meaning the potential for costly mistakes is huge, with settlement agreements becoming a viable tool to resolve some of the challenges presented.

Whilst businesses will hope for an amicable split, the redundancy process can come with a lot of mixed emotions, especially given the current situation, so it’s impossible to guarantee every redundancy will proceed without dispute.

Settlement agreements ensure you part company on certain agreed terms, under which employees will waive their right to bring any claims against their employer, allowing businesses to focus on their own long-term stability and indeed, survival.

Not only this, but settlement agreements ensure employees receive a fair financial package, higher than they usually would, which given the ongoing economic uncertainty, could make a big difference to their own personal situation.

Agreeing neutral terms

In some cases, there may have been a past incident that although addressed and resolved at the time, could resurface if the employee in question feels aggrieved at the prospect of redundancy.

In this situation, the business may feel it’s necessary to use a settlement agreement to avoid the potential of a costly employment tribunal, where there’s a risk the employee is awarded significant compensation.

However, before a settlement agreement can be arranged, its terms must be mutually agreed between the employer and employee and set out in the written statement agreement documents.

With regards to the settlement payment, the agreement should also contain a clear breakdown of the payments which have been agreed and whether any of them are to be paid tax-free.

Most settlement agreements will also include a confidentiality clause, which requires the employee to keep the terms of the agreement, the settlement amount and the reasons for the agreement confidential.

The costs involved

In terms of how much a settlement agreement may cost a business, there is no set scale of payments, as the amount of any settlement payment depends on the circumstances of each case.

There are several key factors to consider when deciding the amount, these include:

  • How long the employee has worked for the business
  • The circumstances around why they are being offered a settlement agreement
  • How long it would take to settle the dispute normally
  • The potential liability/cost of having to defend the claim at a tribunal

In addition to the cost of the settlement payment itself, it’s not uncommon for the business to cover or contribute to the individual’s legal costs, as they are required to seek independent legal advice on the terms of the agreement.

This statutory requirement, set out in section 203(3) Employment Rights Act 1996, states the legal adviser must be named in the agreement and have relevant insurance to cover the advice given.

This can vary between businesses, but the amount of this contribution is typically capped between £250 – £500, which should be outlined in a clause within the settlement agreement.

Moving forward positively

Unfortunately, the October deadline for furlough support is expected to precipitate a wave of redundancies across all sectors, as businesses are forced to restructure in order to cope with financial pressures.

It will be a stressful time for employers and employees alike, especially as businesses face an uphill battle to maintain financial stability and secure their long-term survival.

If your business is considering redundancies as part of a wider restructure, then it’s important to contact a team of experienced employment lawyers, who will advise you on how to proceed safely and effectively.

About the author: Tina Chander is a partner at leading Midlands law firm, Wright Hassall and deals with contentious and non-contentious employment law issues. She acts for employers of all sizes from small businesses to large national and international businesses, advising in connection with all aspects of employment tribunal proceedings and appeals.

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Rob Corder

The author Rob Corder