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Employment Settlement - Employer


Author: Dionne Dury


*The case study below is an entirely fictitious example created for illustrative purposes and is not in any way whatsoever based upon the facts of a real-life situation.

Employment Settlement

A settlement agreement (formerly known as a compromise agreement, or a mutual termination agreement).

The Scenario

Anya, as a Director of a Limited Company, runs a business crafting and producing sports nutrition for sale to business, gyms and by mail order.

The Company employs 22 staff. Sales have reduced during Covid lockdowns, primarily due to the closure of gyms and other retail outlets. Several staff members have been furloughed, including Bruce, an accounts assistant.

Business is now picking up and given the reduced Government contribution as from July, Anya wishes to bring back three members of staff, including Bruce, who remain away from usual duties under the furlough scheme.

The difficulty is that Bruce, who has been with the Company since October 2018, has never been a particularly satisfactory employee as one of the three assistants in the accounts team run by Anya’s accounts manager. The other two are back at work, which is getting quite busy again.

Before being placed on Furlough in May 2020, there had been a discussion with Bruce, with the accounts manager present, about his increasing number of errors. As it turned out, the ability to have recourse to the furlough scheme avoided what would have otherwise been the immediate implementation of a Performance Improvement Plan (PIP), with progress reviews to try and secure some change for the better.

Anya’s view is that Bruce does not have what it takes to do the job and would rather if she could see the back of him than spend valuable time and resources on his progression. Anya, therefore, calls her solicitors for advice hoping they may suggest that one way or another, she can declare his job redundant. She asks how expensive it will be to “get rid” of Bruce.

The legal advice

Anya’s solicitor advises that redundancy is unfortunately not the answer. She has admitted business is picking up, and that someone is needed to do the work Bruce would carry out. Her solicitor also advises that if there is a need to reduce numbers, then all three accounts assistants will have to be put into a pool for selection, which will unsettle those staff Anya wishes to keep.

Anya asks what else she could do. Her solicitor considers the PIP Anya had in mind and advises that if that is implemented but unsuccessfully – and is then followed by the adoption of the “Capability” provisions contained with the Company’s Disciplinary procedure, with the required series of warnings – it could be up to 6 months, certainly over 3 months, before reaching a stage where Anya would be able to fairly terminate Bruce’s employment by reason of incapability.

A Settlement Agreement

Anya’s solicitor advises there may be scope to offer Bruce a Settlement Agreement. This would involve meeting with Bruce, either in person or via video link, to initiate a “protected conversation” where Anya would remind Bruce of his past difficulties, emphasising the need, after ending of furlough, to continue with the PIP and that if unsuccessful the next step would inevitably have to be the Company’s Capability Procedure, which might, in the absence of any eventual meaningful improvement, result in the ultimate termination of Bruce’s employment. As an alternative way forward, Anya would be willing to offer Bruce a severance package whereby his employment would end on agreed terms. Anya would need to consider what those terms should be.

Bruce receives an annual salary of £21,500 and is contractually entitled to one month’s notice of termination. On enquiring what she should offer to Bruce, Anya’s solicitor suggests that in addition to the value of the notice pay and any outstanding accrued holiday, she might consider payment of a sum equivalent to two months’ salary, which could be made free of tax as compensation for loss of employment, there being an exemption from tax of such payments of up to £30,000.

Anya’s solicitor advises that any such agreed terms must be contained in a formal Settlement Agreement to be binding upon Bruce and remove any possible right to make any further claims upon Anya’s Company. Also, that it is important, when starting the protected conversation, to make clear to Bruce that:

  • it is of a kind that cannot be referred to openly at a later stage,
  • he is under no obligation to accept or indeed discuss any proposed settlement, and
  • under no circumstances should Bruce be told that whatever happens, Anya will dismiss him.

It should be presented as an option for Bruce to consider against the current situation where otherwise the performance issues will be followed through via a formal process.

The next steps

Unless Bruce should completely turn down Anya’s suggestion, the next step will be for Anya to notify her solicitor of the outcome, who will then prepare a formal Settlement Agreement for Anya to present to Bruce. It will be necessary, so as to ensure the Agreement is valid and binding, for Bruce to obtain legal advice on its terms.

Bruce will need to be informed by Anya:

  • That he is allowed a 10-day period to consider the terms contained
  • To take the proposed Agreement to a solicitor for advice and as appropriate, to go on to deal with the signing arrangements.

Anya’s solicitor also advises that in this situation there is an expectation that the employer will also meet a reasonable figure for the costs of Bruce’s chosen solicitor in advising him. £350 plus VAT would cover this. Her solicitor further advises that Bruce may be keen to secure a good reference as part of any termination arrangements but if agreeing to provide one, whilst the intended PIP does not have to be specifically mentioned in it, Anya must be careful not to describe the quality of Bruce’s work as accounts assistant in misleadingly glowing terms.

Three days later Anya’s solicitor hears from her. The discussion with Bruce went reasonably well. He has indicated willingness to accept the proposed terms of the financial settlement but does ask for an agreed reference. Anya’s solicitor, therefore, prepares a documentary Settlement Agreement and sends it to Anya with a draft letter with wording to be used in sending it to Bruce. The date of actual termination of Bruce’s employment has not been decided upon so Anya’s solicitor suggests the date which is 10 days hence as in practice it is likely Bruce will seek advice within that period.

The Outcome

A week later Anya’s solicitor hears from her again. Anya has received an e-mail from solicitors on Bruce’s behalf. Despite Bruce’s indication of agreement, his solicitor is requesting the compensation sum be increased to the value of three months’ pay. Anya asks for further advice and her solicitor suggests if she is prepared to increase the settlement payment at all, a compromise could be offered somewhere between and to start by offering £4000 as a total sum. Anya will go back to Bruce’s solicitor on that basis and the following day informs her solicitor that happily when she did so, agreement, was quickly reached upon a final figure of £4250.

The Settlement Agreement is therefore concluded, and the date of termination has remained as proposed above. All monies to be paid to Bruce within 28 days.

Whilst Anya would ideally have preferred to have paid to Bruce a little less, and not to have incurred costs to solicitors, in particular the £350 plus VAT to the solicitor engaged by Bruce, overall, she is more than pleased to have achieved the certainty of a parting of the ways with an under-achieving and potentially difficult employee, and where she would otherwise:

  • have applied valuable Company time and resources in progressing the intended PIP
  • have continued to pay salary to Bruce - likely for longer than the value of the settlement represented
  • in the event of dismissing Bruce further down the line on grounds of capability, have stood some level of risk of facing an unfair dismissal claim, however watertight the process had been.

If you are an employer and should need advice in circumstances such as these, please contact Dionne Dury at dionnedury@hatchbrenner.co.uk or 01603 660 811.

Going about the intended protected conversation with the employee in the correct way is highly important and the benefit of early legal advice is usually very worthwhile.

*Please also note that a Settlement Agreement will always contain a strict requirement for keeping confidentiality, another advantage from the employer’s point of view. Hatch Brenner, therefore, once again wish to make very clear the above case study is an entirely fictitious example created for illustrative purposes, and is not in any way whatsoever based upon the facts of a real-life situation

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