The recent rise in settlement agreements – and employees refusing to sign them

Written by Lesley Rennie on 24 October 2022

In an increasingly uncertain operating environment in which businesses are facing sustained financial pressure, employers want certainty around costs. This includes security that they won’t be hit by any unexpected large expenditure, whether in the form legal costs or compensation, as a result of an employee leaving employment.

At the same time, because of rising costs, businesses need to devote managerial efforts to operational matters and their continued survival. As such, they may not have the time to devote to managing a situation properly and in a way which minimises the risks of claims.

Against this backdrop, we’re seeing an increase in employers using settlement agreements to terminate employment.

Exiting employees through settlement agreements carries its own financial implications but, if agreed, ensures a swift and controlled departure with little residual liability.

In this blog, we offer a timely reminder of how settlement agreements work, recap their benefits and limitations, and consider how the cost of living crisis might have contributed to an uptick in their use.

What is a settlement agreement?

A settlement agreement, previously known as a compromise agreement, is a legal, written contract under which usually an employee waives their right to bring an Employment Tribunal claim, such as unfair dismissal, wrongful dismissal, or discrimination, against their employer. This is usually in return for a lump sum payment, sometimes called a termination payment.

Settlement agreements commonly set out the arrangements for the termination of employment, including any period of garden leave and the return of company property, and can impose obligations relating to confidentiality, non-derogatory statements and post-termination activities. The terms of any reference and announcement statement are also often agreed as part of a settlement package.

There are, of course, certain stipulations around how settlement agreements are used. Importantly, because they allow employees to “contract out” of certain pieces of employment legislation by giving up their rights, the law provides that certain minimum conditions must be met. If the agreement doesn’t fulfil these statutory conditions, it won’t be enforceable against the employee, so it’s important that agreements are properly drafted.

The agreement must be in writing and must relate to particular complaints or proceedings, for example an unfair dismissal claim or a discrimination claim.

Given the sensitivity of any settlement discussions and the potential adverse implications should they become public knowledge, any offer of a settlement agreement is usually presented as being “without prejudice”. This means that it cannot be referred to in evidence in any subsequent legal action. Section 111A of the Employment Rights Act also provides that pre-termination negotiations are not admissible in any unfair dismissal claim provided the negotiations comply with certain rules and guidelines.

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When do employers normally use them?

Settlement agreements are used in a variety of different circumstances, usually to end an employment relationship without the risk of a claim but also where there’s the risk of a claim whilst employment is ongoing, for example claims for discrimination, breach of contract or unlawful deduction from wages.

Employers will often use settlement agreements where:

  • They are making redundancies and have decided to pay more than the minimum amount of redundancy pay that they are required to make by law, and want to have the comfort that they will not incur the expense and management time of defending an unfair dismissal claim having paid that enhanced sum.
  • There has been a breakdown in the relationship with the employer, or between employees, and there is not an obvious fair reason for dismissal, or the employer wishes to avoid the management time or disruption to the workforce in tackling the issue.
  • There is some form of dispute between the parties, as an alternative to a grievance or disciplinary outcome, perhaps where the employer’s preferred outcome cannot be implemented without the risk of a claim.
  • There are ongoing performance issues which the employer hasn’t addressed but which have made continued employment unattractive. Here, a settlement agreement offers an amicable resolution which may be of benefit to both parties – the employer avoids the management time and effort in implementing a performance improvement plan and the employee avoids the stress and potential fault-based dismissal inherent in this.
  • The employee has been on long-term sick leave, the medical evidence is inconclusive, and the employer is no longer able to keep the role open for the employee to return to or it’s clear that the employee will not return in the foreseeable future. In both cases, the employer may wish to offer an enhanced sum as a goodwill gesture as opposed to completing a capability process resulting in dismissal and will want to have the security that there will be no recourse to a Tribunal for an unfair dismissal or disability discrimination claim.

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Why are more employers opting for settlement agreements during the cost of living crisis?

There are a number of reasons why employers might see settlement agreements as a good option for resolving employee relations issues during an economic crisis. First and foremost, they reduce the risk of a Tribunal claim, something no organisation would want to bear the cost of, especially right now.

Settlement agreements are also an efficient way to get rid of employees who are costing the business money, such as those who aren’t performing – especially senior individuals – and those on long-term sick. As operating costs increase, they may be useful to employers who have a need to reduce headcount but don’t have a strong enough reason to dismiss.

Crucially, during tough economic times, organisations need everyone on the payroll to be performing at their best and pulling together for the good of the company. Employers want to be able to ensure they are getting the most from their employees with limited time to dedicate to performance management or dealing with employment-related issues, and settlement agreements allow them to do that.

On top of this, a lack of time or money for training can result in acts/omissions which could give rise to liability which businesses will want to cover themselves against. Meanwhile, the ongoing recruitment difficulties many sectors are experiencing as a result of salary pressures can mean that the wrong candidate is appointed for the role or that discrimination strands are not effectively identified and addressed.

Are there any risks with using settlement agreements to get rid of people?

Settlement agreements are generally quick and, if agreed, provide certainty for both parties.  They do, however, have limitations and are by no means a magic wand. Certain claims can’t be settled; failure to inform and consult under TUPE, for example, can only be compromised through Acas conciliation.

What’s more, the employee may have unrealistic settlement expectations and expect a ‘blank cheque’, which could result in a lot of time spent negotiating only to reach an impasse. Then there’s the risk of developing a culture of offering settlement agreements, with employees expecting one to be offered in every case.

The employee may also become more difficult to deal with if settlement negotiations are unsuccessful – something which, in our experience, seems to be happening more often recently.

From a legal point of view, settlement agreements should not be used as a replacement for fair procedures. Some employers have found themselves in trouble when bypassing standard procedures regarding staff on long-term sick leave, for example.

Employers must also remember that the without prejudice rule only applies where there’s a dispute between the parties and discussion is a genuine attempt to resolve it; amicable agreements aren’t covered, although there is a low risk of claims in such situations.

There are also some exceptions to the without prejudice rule, for example if the offer or what’s said is discriminatory. If admissible as evidence, then the fact of offering a settlement agreement can be damaging in a Tribunal situation.

Why are more employees refusing to accept settlement agreements?

As well as increased interest in settlement agreements from employers, we’re also seeing an increase in employees refusing to settle.

Job security is huge right now. Very few people would want to leave their job in the midst of a looming recession, or wish to test the waters of the recruitment market at present.

Qualifying service is a valuable right to relinquish, and if the compensation on offer isn’t sufficient, there can be little incentive to give this up. With mortgage rates hitting a 14-year high, people may also have concerns around re-mortgaging and whether they would be able to obtain the same level of income in a new role.

If the employee refuses to sign, where does this leave the employer?

If the employee doesn’t agree to settle, employers will need to follow a fair process or run the risk of a claim. 

How employers go about dismissing the employee – if they choose to proceed down this path once settlement agreement negotiations fail – will entirely depend on the circumstances. If the employee has two years’ service, the employer will need a fair reason to dismiss, and this must be within the range of reasonable responses. If they don’t, the employer must accept that there’s no way of terminating the employment fairly. At this point, they can either take the risk or bide their time until such a fair reason can be established.

The main risk is that any subsequent process is found to be artificial, with any resulting dismissal being a pre-determined outcome and unfair or discriminatory. Initiating a performance management process shortly after an employee turns down a settlement agreement, for example, is legally risky.

If offered properly, the settlement agreement offer should be inadmissible as evidence at Tribunal. However, employers would still need to take the time to apply the proper fair process, and any initial defects which prompted the settlement offer may not be capable of being remedied. In other words, the risk of a claim may still exist despite any steps taken afterwards.

To make matters worse, the employee may be aggrieved by the offer and become entrenched in their position, making employee engagement difficult.

Is there a better solution?

Managing issues correctly in the first place is a less expensive solution than paying somebody out. It’s therefore important to get it right at the recruitment stage and performance-manage employees during the probationary period and beyond, identifying any issues and addressing these as they arise.

Employers should also ensure that contracts are in place and regularly review these as well as their policies and procedures. An Employment Disputes Insurance policy, for example, will give employers the comfort of insurance for Tribunal claims, and is a much more cost-effective solution than offering settlement agreements unnecessarily.

Manager training on key employment law matters, clearly communicated standards of behaviour and expectations, and clear lines of communication and support between HR and line managers will also help to prevent the need for settlement agreements.

What does all of this suggest about the employer-employee relationship?

The fact that we’re seeing more employees refusing to accept settlement agreements could be a sign that we’re slowly shifting away from a candidate-driven market. In the past two years, employers in sectors such as retail and hospitality have struggled to keep hold of staff – now, some employers are struggling to get rid of them.

This could be both a good and bad thing for organisations. While the recession may have a positive impact on retention – and could even mean less grievances and disputes given employees don’t want to ‘rock the boat’ for fear of losing their jobs – it could also make it more difficult to dismiss staff who aren’t pulling their weight…

Related Content

Specialist support with settlement agreements

At WorkNest, we’re seeing a general increase in employers deciding to go down the settlement agreement route. 

Whether prompted by a contentious redundancy process, a grievance, underperformance or long-term sickness absence, our Employment Law experts can help to take the stress out of the settlement process so you can resolve employee disputes or end employment fairly and compliantly.

And, unlike other fixed-fee providers who charge extra for document drafting, with our comprehensive service, it’s covered in the cost.

For more information and to discuss your specific situation, call 0345 226 8393 or request your free consultation using the button below.

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