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How to use a settlement agreement during the redundancy process
Written on 29 January 2025
Rather than going through a lengthy and time-consuming redundancy procedure, it’s common for employers to try and reach a settlement agreement with the affected employee.
A settlement agreement (formerly known as a compromise agreement) is a legally-binding document between an employer and employee which settles any claims that arise from the employment relationship or the termination of employment.
In essence, an employee waives their rights to bring legal claims against their employer in return for a discretionary severance payment.
How can settlement agreements help in redundancy situations?
Typically, most legal claims regarding statutory and contractual rights can be waived as part of the agreed terms in a settlement agreement. This includes the right to bring claims of unfair dismissal and discrimination, as well as entitlement to statutory redundancy pay.
By waiving these rights, the employer has the peace of mind that they will not have to spend considerable time, resource and money defending a claim in an Employment Tribunal.
Depending on the circumstances, settlement agreements may be a quicker and more cost-effective way to terminate someone’s employment. They can save employers from having to go through a formal redundancy procedure, which can be a complex and time-consuming exercise.
Remember that in cases of small-scale redundancies (fewer than 20 redundancies in 90 days at one establishment), there are a number of things that employers need to do to make the process fair, including warning employees of redundancies, creating and applying fair and non-discriminatory scoring criteria, consulting with employees, and considering suitable alternative employment options.
In cases of large-scale redundancies (more than 20 redundancies in 90 days at one establishment), employers will also need to adhere to collective consultation rules. If you’re making 20 to 99 redundancies, you must consult for at least 30 days; if you’re making over 100 redundancies, you must consult for at least 45 days before dismissal.
Moreover, settlement agreements can help avoid bad publicity. The agreement should contain a ‘non-derogatory’ clause, which prevents the employee from making negative or derogatory comments about the employer, including on social networking sites. You should also agree that the terms of the agreement and the circumstances surrounding the termination are kept confidential.
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No deal?
Employers cannot force employees to agree to the terms and conditions they wish to enforce through the settlement agreement.
If the individual feels, after taking advice from an independent legal adviser, that it’s not right for them, you will need to resort back to the formal redundancy procedure – and go through all the necessary hoops – to terminate their employment.
Even in cases where you’re unable to reach an agreement, there are some circumstances in which the negotiation discussions cannot be used as evidence in legal proceedings by either party to support their cases.
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If in doubt, seek advice
Settlement agreements aren’t the solution to every problem. Speaking to an Employment Law Adviser will allow you to determine whether they are right for you.
Before taking action, why not give our team a call? Our Employment Law and HR experts have extensive experience guiding employers through redundancy situations, advising on the use of settlement agreements, and can even draft these complex legal documents on your behalf.
For support, call 0345 226 8393 or request your free consultation using the button below.