Talking Employment Law: Redundancy and settlement agreements - What you need to know

In this podcast, Lucy White and Shauna Jones, members of the employment team at Clarkslegal, will guide you through the complex topics of redundancy and settlement agreements. They will explain what redundancy means for both employers and employees and how settlement agreements work in practice.

Topics covered:

• What is redundancy? 
• What rights does an employee have if they are made redundant? 
• What is a settlement agreement? 
• What is a protected conversation? 
• What does "without prejudice" mean?
• What are the differences between redundancy and settlement agreements?
• How is a settlement agreement negotiated? 
• What must an employer include in a settlement agreement? 
• Are payments in settlement agreements taxable? 
• Confidentiality clauses in a settlement agreement 
• What other standard terms are found in settlement agreements? 
• How much time should an employee be given to consider a settlement agreement? 

If you have any questions about anything discussed in this podcast or need assistance drafting or negotiating a settlement agreement, our experienced employment team would be more than happy to advise.

Transcript

Lucy White: 00:06

Hello, my name is Lucy White and I’m a Solicitor in Clarkslegal employment team. I am joined by Shauna Jones, also a solicitor in our team, for today’s podcast on Redundancy and Settlement Agreements. 

Over the next few minutes, we will guide you through this tricky topic, covering what redundancy means for both employers and employees, and how settlement agreements work in practice. 

Let’s first recap what a redundancy is – put simply, a redundancy is a type of dismissal that occurs when a role is no longer needed. Shauna, would you be able to expand on how the law sees redundancy? 

Shauna Jones: 00:44

Thank you Lucy. Yes, there is a slightly more complex legal definition of a redundancy, which covers three types of situations: 

The first is where there is a business closure – for example when the company stops trading

The second is where there is a workplace closure – so where a site or store closes

And the third is where there is a reduction in work of that particular kind, so there is less need of a certain type of work to be done. 

In the UK, redundancy is one of the potentially fair reasons for dismissal, and employers may use this as a defence to an unfair dismissal claim. 

Lucy White: 01:17

What factors will need to be taken into account for a redundancy dismissal to be considered fair? 

Shauna Jones: 01:25

Well, there’s a few factors an employer should be aware of: 

• The redundancy must be genuine
• There must be an appropriate pool for selection 
• The individuals in that pool must be consulted 
• An objective selection criteria needs to be applied to those in the redundancy pool and
• Alternative employment (that is suitable for the employee) should be considered where appropriate

One thing to note is, if an employer selects an employee for redundancy based on a protected characteristic, for example age, gender, pregnancy or being on maternity leave, or on the basis that they are a part-time or fixed term worker, then the employer may still face claims for discrimination or less favourable treatment. 

Lucy White: 02:08

Employees have several rights that arise in a redundancy situation that employers must be mindful of. As Shauna has just mentioned, employees must be consulted – this is because there is a right to individual consultation about their potential redundancy. This consultation has to be meaningful, rather than simply a tick-box exercise. 

There is also a right to collective consultation where 20 or more employees are to be made redundant in one establishment over a 90-day period. This is a separate requirement to the individual consultations and can carry potentially serious consequences for non-compliance. 

Shauna also mentioned alternative employment – if suitable roles are available elsewhere in the company, employers should offer this to at-risk employees. Whether a role is suitable will depend on factors such as skill, responsibility, pay and location. 

Shauna Jones: 03:04

Employees are entitled to their contractual notice (with employers required to comply with the statutory minimum notice period) and employees may have additional rights depending on their length of service. Employees with more than 2 years’ service are entitled to time off to look for new work or to arrange training, and they will also have the right to receive a statutory redundancy payment and a contractual or enhanced redundancy payment if applicable. 

We often hear a lot about “settlement agreements” in relation to redundancies – what does this mean? 

Lucy White: 03:35

A settlement agreement is an agreement between the employer and employee, which sets out the terms covering the end of an employee’s contract of employment. They will usually include a waiver of the employee’s statutory and contractual claims in exchange for a payment. These settlement agreements are legally binding documents, and if one party breaches a settlement agreement, the other may bring a claim against them. 

Settlement agreements can be used in situations where the employee would be able to bring a claim in the employment tribunal, with the agreement preventing the employee from either starting this claim or taking one any further. Such agreements tend to be confidential. 

Shauna Jones: 04:17

That makes sense – how do discussions around what the terms of a settlement agreement come about? 

Lucy White: 04:23

Discussions about settlement agreements are known as “protected conversations” and in redundancy situations they tend to start before a dismissal takes place. You would commonly see any written correspondence between the employee and employer relating to settlement agreements marked as “without prejudice” – Shauna, can you take us through what this means? 

Shauna Jones: 04:48

Sure – without prejudice is a label that can be applied to documents where parties are making a genuine attempt to settle either existing or potential disputes. It prevents statements in this context from being used as evidence or admissions in court against the party that made them. 

Without prejudice conversations allow the parties to be more open with one another and are a useful tool in reaching agreements to achieve a resolution.

Lucy White: 05:12

Thanks Shauna, we also see the phrase “without prejudice subject to contract” – how does this differ? 

Shauna Jones: 05:20

The use of “subject to contract” means that nothing said during these without prejudice conversations will create a legally binding contract. All the terms must be agreed and signed by the parties in order for contract to actually arise. 

Lucy White: 05:34

It is common for settlement agreements to be offered in the course of a redundancy. They are voluntary, which means an employee has the chance to negotiate and may refuse to sign if the terms do not suit them. It may be the case that an employer provides the employee with a certain timeframe to confirm acceptance to the terms. Payments offered under a settlement agreement are usually more generous than the statutory redundancy payments employees may be entitled to, which can make them attractive options. 

If a settlement agreement is reached in redundancy situations, employers can avoid the potentially lengthy consultation process as well as avoid future tribunal claims. Due to the confidential nature of settlement agreements, any terms agreed with the employee will not be disclosed to others. 

Shauna Jones: 06:24

Other situations where a settlement agreement may be offered include where an employer wants to dismiss an employee for gross misconduct, but does not want to deal with any potential claim for unfair dismissal. 

Lucy White: 06:35

Having now looked at what they are and the effects of entering into a settlement agreement, what happens if terms can’t be agreed? 

Shauna Jones: 06:43

So employers are still free to go through the redundancy process if an employee rejects a proposed settlement agreement. Employees may take advice on whether the redundancy has been done in a fair way, and whether they may have any claims against the employer for unfair dismissal. This is why employees will look carefully at any potential payment offered in a settlement agreement – they may be able to receive a larger sum of compensation than the amount being offered to them. 

Lucy White: 07:10

All of these factors are important to consider when negotiating a settlement agreement. For example, if the redundancy situation is not genuine, employees may leverage the fact they could have a claim for unfair dismissal to persuade the employer to increase the benefits in the agreement. 

As we are discussing payments and benefits, are these payments under a settlement agreement taxable? 

Shauna Jones: 07:34

The first £30,000 of a termination payment is not taxable. Anything over this threshold will be subject to tax in the usual way. Payment entitlements under the employment contract, such as salary, holiday pay, bonuses and PILONs will be taxable. 

Lucy White: 07:50

We’ve talked a lot about the negotiations for settlement agreements – lets now look into what the other terms of a settlement agreement actually look like. Shauna, can you talk us through some of the standard terms in a settlement agreement?

Shauna Jones: 08:04

Of course – there’s a few that will crop up time and again, which include: 

1. The employer will pay the employee the outstanding balance for salary, bonuses, commission, and holiday as well as the termination payment as we discussed.
2. What date the employee’s employment will end, whether the employee will work their notice or if they need to do a handover. 
3. What will happen to certain benefits for example share or health schemes, the company car etc
4. Whether tax deductions are applicable and who bears responsibility for further taxes
5. A clause covering legal fees and 
6. A clause stopping the employee from making derogatory comments about the employer, either in person or on social media 

Lucy White: 08:45

Settlement agreements can be complex, and while it’s open to employees to negotiate the terms of agreements themselves, many will turn to a solicitor to help negotiate certain points or make legal arguments to their employer that supports their position. 

For a settlement agreement to be valid, employees must obtain independent legal advice. This is because employees must understand the effect of the settlement agreement on their rights and ability to bring a claim against their employer. This is why one of the common terms of a settlement agreement is a contribution towards the employee’s legal fees. 

Involving solicitors in negotiations can also be useful in situations where the employee’s first language is not English. It prevents the agreement being challenged at a later date for reasons such as discrimination or that the employee under duress. Solicitors are also well placed to answer questions about the settlement agreement and thereby reduce the time and costs of reaching agreements. 

Shauna Jones: 09:46

Another clause commonly seen in settlement agreements is a confidentiality clause, which is a benefit for both parties. Neither side will be permitted to disclose the terms of a settlement agreement once agreed, subject to a few exceptions. Employees for example are usually permitted to tell their partner or spouse about the agreement, and can still speak to police or regulators about criminal issues or misconduct. Confidentiality clauses also do not prevent employees from making protected disclosures also known as whistleblowing. 

Employees are also normally allowed under the confidentiality clauses to confirm they were made redundant to potential recruiters and so they can speak to their future employers about this. Employees can also speak to insurers about income protection claims. 

Lucy White: 10:30

Given the potential complexities of a settlement agreement, ACAS guidance on the topic states that, as a rule, employees should have a minimum of 10 calendar days to consider any proposed formal written terms and take independent legal advice, unless the parties have agreed otherwise. 

We hope this has helped to shed some light on this potentially tricky area of law. If you have any questions about anything we have discussed today or need help with drafting or negotiating a settlement agreement, our experienced employment team would be more than happy to advise. 

Thank you for listening and we hope you enjoyed this podcast.