A Sharp Rise in Settlement Agreements as Employers Face Tough Decisions on Workforce Reductions due to COVID-19

A Sharp Rise in Settlement Agreements as Employers Face Tough Decisions on Workforce Reductions due to COVID-19

With the UK Government announcing further relaxation of lockdown rules, individuals, businesses, and employers are attempting to adapt to new rules and regulations.

As of June 28, 2020, approximately 9.3 million jobs, from 1.1 million different employers were furloughed in the United Kingdom as part of the government’s Coronavirus Job Retention Scheme. As businesses begin to slowly reopen, the devastating effect the pandemic had on businesses means that redundancies are now unavoidable. As a result, we expect to see a significant increase in individuals being offered Settlement Agreements as they are let go.

What is a Settlement Agreement?

A Settlement Agreement is a formal written legal document setting out the terms on which the relationship between the employer and the employee will terminate. Commonly, under the terms of a Settlement Agreement, the employer will agree to pay the employee a sum of money, in return for the employee signing the Agreement.  In exchange for this financial incentive, the employee agrees to waive their rights to bring claims against their former employer, including claims such as:

  • Unfair dismissal
  • Breach of contract
  • Discrimination
  • Personal injury claims.

Who can enter into a Settlement Agreement?

Normally it is an employer and employee that enter into a Settlement Agreement.

What terms are typically covered in a Settlement Agreement?

From the employee’s perspective, the Settlement Agreement will set out the payments they will receive upon termination of their employment. In the event that they have been made redundant, this is likely to include a statutory redundancy payment but will usually include an additional ‘ex gratia’ payment to be made to the employee tax-free.

In addition, an employee is likely to be entitled to either a notice period or a payment in lieu of notice. A payment in lieu of notice is often made when a Settlement Agreement is being entered into. There is also likely to be a further payment to account for accrued but untaken holiday pay.

Finally, there will be a contribution towards the legal costs of entering into the agreement, usually around £350 plus vat, which is often paid directly to the employee’s professional adviser.

From the employer’s perspective, the intention is to have the employee waive any rights of claim that they may have against them. This gives the employer the peace of mind that there will not be a claim lurking around the corner.

Why might an employee be offered a Settlement Agreement?

An employer may give an employee a Settlement Agreement if they have been told their employment will come to an end.  Settlement Agreements can be used to conclude any workplace dispute and are commonly offered to employees in the following circumstances:

  • An employee is informed that their role is at risk of redundancy
  • Where an employer has raised concerns about employee performance
  • An employee is on long-term sickness absence
  • The business has been acquired
  • To settle a grievance

What should you do if you are asked to sign a Settlement Agreement?

You will normally be informed that you should take legal advice on the terms and effect of a Settlement Agreement. Further, a failure to receive appropriate independent advice on the agreement will render it invalid. In any event, you should always take legal advice before entering into such an agreement given that the purpose is to waive any rights to claim against your employer.

Are Settlement Agreements Legally Binding?

Once the agreement is signed by all parties, it becomes legally binding. As a result, it is essential that all outstanding issues, such as any back pay or expenses are settled before signing.  An employee may also want to come to an agreement on certain non-financial matters, such as references for future employment.

A Settlement Agreement is not binding until an employee obtains independent legal advice on the terms. For this reason, most employers will contribute toward your legal costs as mentioned above.

We regularly advise on Settlement Agreements and if you have any questions or would like help, please email Rooney Nimmo Partner Dawn Robertson, or call 0131 220 9579.


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