This week, Sainsbury's became the latest UK employer to make sweeping job cuts, as the supermarket announced 3,000 redundancies and cafe closures as part of its ongoing restructure.
In light of this, and with recent data suggesting almost 170,000 retail jobs were lost in 2024 alone, it’s important that employers are fully clued up on settlement agreements – which can be hugely beneficial to firms going through a process like this.
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 an additional cost to the employer of entering into settlement agreements with an employee, 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 redundancy pay whether they sign a settlement agreement or not, so an additional sum is required to ensure that there is consideration for the waiver of their legal rights.
However, whilst the initial cost may be more, there are significant advantages for both sides, including:
It 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, which takes up previous business time, particularly during difficult times such as these.
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 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 settling their claims.
It results in an amicable exit
Redundancy processes are unpleasant and often emotional for those involved on both sides. A settlement agreement allows for the exit to more amicable and reduces the stress of a difficult process.
It means ‘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.
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 working for competitors for a period of time.
Costs are saved
Whilst there is an additional cost of offering settlement agreements, it 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 we recommend.
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Paul Hennity
Employment Law Partner
Paul provides pragmatic and commercial advice to both employers and employees and is highly experienced in dealing with claims in the employment tribunal and negotiating settlement agreements.