Settlement Agreements / Redundancies are hitting the press

Bulk redundancies are appearing in industry publications and news articles more and more frequently. High Street Retailers and those manufacturers moving overseas are causing serious ripples across the UK. Many businesses, including the larger law firms, are having to make a significant number of employees redundant at the same time whether this is due to changes in business structure or to remain competitive within their industry. As redundancies are an effective termination, settlement agreements are the preferred mechanism to ensure a smooth and secure end to employer-employee relationship/contractual relationship.

A settlement agreement is a contract which details the terms of an employee's exit from the business and is signed by both the employer and employee, which often have been pre-agreed between them. It is quite common that the settlement agreement will include either an ex gratia (with gratitude) payment or an enhanced redundancy package to be paid to the employee. This is the case as the settlement agreement will require the employee to sign a waiver of their employment rights meaning that they would not be able to bring a claim against their employer for breach of contract, unfair or wrongful dismissal and discrimination. An employer must factor in the cost of a solicitor to advise the employee as this is a requirement , for a settlement agreement to be legally binding, to ensure no undue pressure is placed on an employee.

If the business can present a well drafted settlement agreement which is fair to both parties it will help to promote good relations between those involved and ensure that the employee doesn't feel aggrieved. This is preferential for all parties , to avoid protracted negotiations and bad blood which could harm ongoing client relationships or mar remaining staff relationships with their employer.

If you are an employee who has been presented with a settlement agreement or you are an employer who is considering the benefits of one, it is helpful for you to know that they are a clean and effective way of achieving a clean break from the business. The first £30,000 of the compensation payment can usually be paid free from tax deductions and national insurance contributions. If the settlement sum is in excess of £30,000 then the balance will be subject to tax but not national insurance contributions. Sometimes it is the case that there is a provision in the contract of employment that a payment in lieu of notice (PILON) will be contained within the settlement agreement. This allows the employee to receive a lump sum payment equal to what they would have earned during the notice period but without the requirement to work during that period. The PILON will be subject to tax deductions and NIC in the usual way whether a PILON clause was included in the employment contract or not. As of April 2018, income tax and NIC are payable on the PILON as this payment is treated as earnings as oppose to a settlement payment.

Further changes are due to take effect from April 2019. Any termination payment which is in excess of £30,000 will be subject to income tax and Class 1A NIC. This will effectively increase the cost of termination payments for employers. At present there are no plans to change to the employee NIC and instead the Government has opted to retain the £30,000 exemption and no plans to increase this exemption figure in line with inflation.

There are other benefits of a settlement agreement in that they can avoid the lengthy and sometimes costly formal tribunal process or grievance process which can be stressful. The agreement itself may contain wording for a reference and/or internal announcement which can be pre-agreed and should also contain a clause that confirms that the employer will make a contribution to the legal costs for the employee to receive advice. This is a protective measure to ensure that the employee receives legal advice and understands the terms of the agreement and it has been signed by a legal advisor who is independent from the Company. Often you will find confidentiality provisions ; provisions for garden leave ; that both employer and employee will refrain from derogatory statements.

We are employment experts and can offer employees experienced and independent advice when they are presented with a settlement agreement. We offer straight forward advice in order to make the process painless and swift, where possible.

We are on a number of panels for large organisations who maybe considering a number of redundancies and if you as are employer need to make multiple redundancies we can assist you. We can offer a discounted rate and can have employees meet with our expert lawyers in the City or arrange lawyers to visit the place of employment to meet with a number of employees in a day.