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Airport City, Manchester 0161 537 3324

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30th September, 2021

End of Furlough – why settlement agreements are the safest option

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As most businesses will be aware, the Coronavirus Job Retention Scheme, or furlough scheme, comes to an end today, meaning that many employers will be forced to make the difficult decision to reduce their workforce numbers by reason of redundancy.

Any internal process leading to the termination of an individual’s employment contract (including making an employee redundant) leaves an employer exposed to Employment Tribunal claims, even when a fair process has been followed. If an Employment Tribunal claim is made by an ex-employee, defending the matter can be disruptive, costly and time consuming for the business, even if the case is ultimately defended successfully.

For those employers who have taken advantage of the furlough scheme, but who are now facing the very real reality of having to commence redundancy processes, settlement agreements (if signed) are an effective way of terminating employment, whilst ensuring complete protection from claims from employees.

A settlement agreement is a legally binding written agreement which provides an employee with a sum of money (and any other agreed benefits, such as a reference) in exchange for their employment being terminated on mutually agreed terms. Whilst there is a cost to the employer when entering into settlement agreements, the main benefit is that the employee agrees to waive any claims that they have which arises, or may arise, out of their employment or its termination.

In a redundancy situation, where an employer is seeking for employees to sign settlement agreements, the expectation would be that the termination payment would have to be more than the statutory redundancy payment. This is because the employee would be entitled to their redundancy pay whether they sign a settlement agreement or not, so they would not be getting anything in addition to it as consideration for them agreeing to waive their claims. However, whilst the initial cost to the employer may be more, there are significant advantages which we have set out here:-

1. Saves Business Time

Settlement agreements can avoid the need for a potentially lengthy redundancy procedure, which can take up a lot of business time to ensure it is done properly. Remember that a Tribunal will also examine the procedural fairness of redundancy dismissals so processes must be carried out carefully; this takes up previous business time, particularly during difficult times such as these.

2. Complete Protection from Claims

In order for a settlement agreement to be legally binding, the employee must receive independent legal advice as to the claims that they are waiving. Whilst the employer usually contributes a fee towards the cost of this advice, it gives reassurance that the employee understands what they are signing and that by accepting the money they are also agreeing to settle their claims.

3. Amicable Exit

Redundancy processes are unpleasant and often emotional for those involved on both sides. A settlement agreement allows for the exit to be more amicable and reduces the stress of a difficult process.

4. Without Prejudice Protection

Provided they are carried out correctly, discussions surrounding settlement agreements are ‘Without Prejudice’, meaning that they cannot be referred to in any future Employment Tribunal proceedings should the discussions be unsuccessful.

5. Confidentiality and other additional protections.

Settlement agreements are confidential documents and therefore the terms of the exit will not be common knowledge. Settlement agreements can also contain clauses to prevent employees from making negative or derogatory comments in relation to the business, ensuring reputational damage is limited. They can also restrict employees from taking confidential information or even from working for competitors for a period of time after their termination.

6. Costs saving

Whilst there is an additional cost of offering settlement agreements, the additional cost will quickly be spent if the employer finds itself having to defend an Employment Tribunal claim. Costs in the tribunal are not recoverable from the losing party, and so defending claims with legal advice is expensive, and often more than the value of the claim.

In summary, settlement agreements are a great way of limiting liability for employers, particularly when managing redundancy situations. Redundancy processes are time consuming and stressful for all involved, and settlement agreements can go a long way to alleviate that stress and save time. Given that redundancy payments are being made to staff anyway on termination, our view is that if it is possible to top up that payment to ensure a settlement agreement is signed, then it is always an option that we would recommend.

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