What is a Settlement Agreement?

Running a business is tough as it is, whether your an expanding enterprise or one that is re-structuring, making the right decision, more specifically following the right processes can mean the difference between “make or break”. One really important area that is so often misunderstood is “Settlement Agreement”.

  • The agreement must be in writing;
  • The agreement must relate to a certain complaint or proceedings;
  • The employee must have received independent legal advice on the agreement (including the agreements effect on their ability to pursue the statutory right/s in question);
  • The independent legal adviser must be identified in the agreement;
  • The independent legal adviser must have insurance; and
  • The agreement must state that the necessary regulatory conditions regarding settlement agreements have been met.

Yours staff are the assets of your business, but what about when they are not?

Are you dealing with challenging employees that are causing your business difficulties? Do you want to dismiss an employee but are afraid of possible costly and lengthy claims of unfair dismissal or discrimination (amongst others)?

On average, 17,000 claims are submitted to the employment tribunal each month. These claims range from unlawful discrimination (where compensation is not capped and in 2011/12 an employment tribunal awarded compensation of £4.4 million in a claim of race discrimination) to unfair dismissal (where compensation is, generally, capped at £87,700 or one year’s wages).

What can I do to avoid liability?

A Settlement Agreement (formerly called a Compromise Agreement), can settle a dispute or provide a release or waiver of claims in order to limit potential liability of your company. This could help your company to reduce costly legal fees to defend a claim.

Under a Settlement Agreement, an employee (or worker) agrees not to pursue certain statutory employment tribunal claims against a company.

Settlement Agreements are usually used to record an employee’s terms of departure where the employee is to receive a termination payment in return for the employee waiving all actual and potential statutory (and usually common law) claims against the employer.

What makes a valid settlement agreement?

It is important that the settlement agreement meets certain conditions:

If you are looking to enter into a settlement agreement, contact ourselves today and we can give you our independent legal advice. We can also assist you in preparing a settlement agreement to stop unnecessary headaches caused by problematic employees.


How do I make redundancies?

Due to the current economic climate, it may be necessary to look into downsizing or restructuring your company. It is important to look into the needs of the company while balancing the needs of employees. Making one or more employees redundant may be necessary.

Redundancies can be a lengthy and difficult task and it is important that you follow correct procedures. Nobody wants the cost of defending a claim of unfair dismissal when compensation generally could be as much as one year’s wages or £87,700.00 (the maximum basic and compensatory award).

We strongly recommend that you obtain detailed legal advice, however, we answer some common questions about redundancies below.

Question 1: do I need to establish whether there is a genuine redundancy situation?

Yes, it is very important to establish whether there is a genuine redundancy situation.

What is a genuine redundancy situation?

Generally, the three questions to ask are:-

  • Is there a closure of the business for which the employee was employed?
  • Is there a closure of the place of business where the employee was employed to work?
  • Is there a reduced requirement for employees to carry out work of a particular kind?

If one of the above applies, there may be a genuine redundancy situation.

Be careful to evidence a genuine redundancy situation. Failure to do so may mean that a redundant employee can argue that there was no genuine redundancy situation and the redundancy was unfair.

Question 2: do I need to consider pool and selection criteria and list any alternative vacancies?

The rules differ depending on whether there are fewer, or more, than 20 redundancies.

Generally, you must consider the appropriate pool of employees (if selection will be necessary). This means you must select a group of employees where redundancies may be necessary. For example, if there is a downturn in work for administrators, then receptionists, administrators and typists may be in the pool of employees.

You must also establish a proposed set of objective selection criteria if selection will be necessary. This means that you score each employee in the pool of employees on certain criteria, for example, experience, qualifications, timekeeping etc. It is important that the selection criteria is objective and justifiable.

You need to inform employees of possible alternative vacancies to minimise redundancies.

Question 3: do I need to notify the Secretary of State if making redundancies?

Yes, but only if you are planning to make over 20 employees redundant. This is called making collective redundancies.

Certain deadlines apply where there are 20-99 and 100 plus proposed redundancies will be made.

Question 4: do I need to meet with the staff to make redundancies?

Yes, it is important to meet with all of the employees who might be made redundant (as a group). Communication is the key to keeping employees updated and satisfied.

Certain information should be provided to the employees at the meeting, such as the reasons for the potential redundancies and how many jobs are at risk. It is important to explain that the company is exploring ways of reducing redundancies and to give employees the opportunity to think of ways which could reduce redundancies.

Question 5: after meeting with the staff, do I need to write to employees about redundancies?

Yes, it is important to write to all employees who attended the first meeting to confirm the information given during the meeting. If applicable, include a copy of the selection criteria and scoring guidelines.

Question 6: what is collective consultation?

Collective consultation will only be necessary where 20 or more redundancies are being proposed within a 90-day period.

Certain rules apply for collective consultations and it is important to get detailed legal advice in order to adhere to them.

Question 7: How do I score employees who are at risk of redundancy?

It is important to use the selection criteria and scoring guidelines which you should have established (see question 2, above). Try to make the scoring as objective as possible and make sure that you can evidence your decisions, For example, if you score an employee with a perfect disciplinary record only 5 out of 10 when an employee with a poor disciplinary record is scored 10 out of 10, this may lead to unfair dismissal claims.

Scoring each employee correctly is important and it will hopefully reduce potential claims.

Question 8: after scoring employees, do I need to send another letter to employees about redundancies?

For all employees that have provisionally been selected for redundancy, write to them inviting them to a meeting to discuss their provisional selection for redundancy.

The letter should detail the prior consultation and set out the reasons for the redundancy situation and for provisionally selecting the employee for redundancy.

Question 9: do I meet with employees individually if they are provisionally selected for redundancy?

Yes, you must consult with each employee individually about their scores, the proposal to select them for redundancy and the terms of the redundancy. It is also important to discuss with the employee if they have any ideas which would reduce the need to make redundancies.

It is again important to carry out fair procedures and missing certain information, such as not informing the employee of the ‘required score’, which is the score they needed to achieve in order to not be selected for redundancy, may result in a claim for unfair dismissal.

Question 10: what do I need to do after meeting individually meeting employees?

After all individual meetings, follow up any suggestions made to avoid the redundancies and consider any representations made by the employee regarding their scores.

If any employee’s score changes as a result of this process, check if this will result in a change to the group of employees that have been provisionally selected for redundancy. Failure to amend the scores (when applicable) may result in a claim of unfair dismissal.

Question 11: do I need to hold a further meeting?

Yes, where a decision has been made to make an employee redundant, invite that employee to a further meeting.

Question 12: do I need to confirm in writing the decision to make an employee redundant?

Yes, it is important to write to the employee confirming the decision to dismiss them as redundant and specify the termination date. It is also important to calculate the amount of the redundancy payment the employee is entitled to and inform the employee of the right to appeal.

Question 13: do I need to hold an appeal hearing?

Yes, if employee appeals, invite them to attend a further meeting to hear the appeal.

In 2012/13, there were a total of 49,036 unfair dismissal claims submitted to the employment tribunal. Take legal advice to not become part of this rising statistic.