Redundancy is not an employer’s only option for ending someone’s employment. An alternative to a conventional redundancy is a redundancy settlement agreement. This is a legally-binding contract, which both the employer and employee sign. Another name for this is a compromise agreement.
It is an agreement that is designed to settle any claims the employee would have against the employer.
This type of agreement becomes the basis on which the employer and employee agree to end the employment.
What are the Benefits?
Where an employment relationship has run its course, a redundancy settlement agreement can bring things to a swift, tidy end, without the need of following through a lengthy redundancy process, which can be expensive and stressful.
Employers can also utilise redundancy settlement agreements to protect themselves from any claims arising out of the employee’s employment as employment tribunals can be costly, and they can be drawn-out and stressful for everyone involved.
Redundancy settlement agreements on the other hand, can benefit both employer and employee:
- The employee may gain a better outcome financially, and as part of the agreement, a reference form the employer to help find future work
- The employer does not have to go through the time and expense of a tribunal process, with potential litigation risk and any uncertainties of the outcome.
The agreement may also include a confidentiality clause and a clause to prevent employee making derogatory remarks about the employer after leaving employment. These can benefit the employer in terms of reputation management.
A settlement agreement differs from a redundancy situation because it involves the employee agreeing to certain terms and conditions, which become legally binding.
How Does a Redundancy Settlement Agreement Work?
A redundancy settlement agreement is between an employee and their employer.
The agreement is between individuals, but employers can use settlement agreements in collective workplace situations.
This can help to streamline the redundancy process, avoiding a protracted consultation period and minimising the risk of future claims coming through employment tribunals.
Typically, in a settlement agreement, the employee agrees to waive most of their legal claims, and the employer offers a payment for termination of employment.
Along with the confidentiality and reputation-related clauses we have already mentioned, the settlement agreement may also have certain post-termination restrictions for the employee.
These might restrict the employee’s activities for a set period, such as seeking employment with a direct competitor, to protect the employer’s business interests.
What is in a Redundancy Settlement Agreement?
The main aspects of a settlement agreement of this type could include:
- The value of the termination payment made to the employee
- Any notice pay or holiday pay that is due to the employee
- Any contractual bonuses, benefits or shares
- Confidentiality clauses
- The waiver and settlement of employee claims
- Employee references from the employer.
The employer should open preliminary discussions with the employee, and make an offer verbally or in writing. In some circumstances, the employee might choose to first approach the employer and open discussions this way.
A written proposal from the employer may be better in avoiding any ambiguities and offering clarity from the start.
Once the employer and employee agree what the terms should be, these should appear in writing in the final settlement agreement.
The settlement agreement should include full details of settlement payments and non-financial terms.
The current limit on non-tax deductible settlement payments to employees is £30,000.
When calculating the settlement, the employer should consider things such as:
- Length of employment
- Reasons for offering a redundancy settlement agreement
- The time and costs which would be involved without a settlement
- How long it might take the employee to find a new job.
The non-financial terms of a redundancy settlement agreement can include:
- A reference that the employer gives the employee – both parties should agree on the wording of this
- Confidentiality (non-disclosure) clause
- Clause preventing the employee making derogatory remarks about the employer.
The agreement may also have certain exclusions, which both parties agree to, such as pension rights or the right to pursue injury claims.
Is a Redundancy Settlement Agreement Legally Binding?
For an agreement to be legally-binding it needs to meet certain statutory requirements:
- It must be in writing
- It must relate to specific complaint or proceedings
- The employee must have had independent legal advice The agreement must identify the independent adviser
- The agreement must state that it meets these statutory requirements.
- Any settlement agreement that does not meet these statutory requirements will not be a legally-binding contract.
For there to be a formal written agreement, the employee must have received legal advice from an independent adviser, and the agreement must name this adviser.
In this role, a solicitor can advise the employee.
They will provide essential advice on the employee’s legal rights, and what they are waiving by signing the agreement. They will explain the terms of the settlement agreement, and how it will affect the employee.
They may provide advice on specific wording in the agreement, in case the employee wishes to negotiate with the employer about any part of it.
Redundancy or Settlement Agreement?
The law defines a redundancy, and the employer must go through a fair redundancy procedure.
From the employer’s perspective, the redundancy procedure can be drawn-out and costly in terms of administration and overall morale at work.
The alternative is a settlement agreement, to which both parties agree, and which can offer a more streamlined route to a clean break.