Spotlight on Settlement Agreements in employment

Sometimes it’s time to call it a day. The reasons for exiting employees can be varied and sometimes the better option is to come to an amicable(ish) agreement to avoid litigation and perhaps reputational risks.

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But how can you achieve that clean break? It all starts with a conversation. But even raising the subject is not without risks, such as the conversation not leading to the agreement hoped for, or worse that the employee then uses it as ammunition in a future tribunal claim.

Protected Conversations and the Without Prejudice Rule

In 2013, the government introduced the idea of “protected conversations” with the intention of allowing employers and employees to have “off the record” conversations with a view to agreeing an exit, usually with a package. The key idea behind the policy is that, if the discussions did not lead to agreement, then it would not be possible for the employee (or the employer) to try to rely on the failed conversations in any later unfair dismissal claim the employee might bring. We also have the “without prejudice” rule which can be used to keep so-called “without prejudice” communications out of the sight of employment tribunals and courts.

Sound like a good idea?

Unfortunately, it can get tricky. There are various exceptions to the inadmissibility of protected conversations and without prejudice communications. The former will only give protection in relation to unfair dismissal claims and will have no effect in claims which involve, for example, discrimination or whistle blowing. The latter rule only works where there is a genuine attempt to settle an existing dispute. Therefore if the matter hasn’t come to a head so as to be recognisable as a “dispute” between employer and employee, the conversation may be admitted into evidence in a later case. There are further exceptions to both rules the detail of which lie beyond this article’s scope. Suffice it to say, the conversation should be carefully planned and potentially even scripted, ideally with the benefit of legal input.

And what about your Entitlements, Payments, and Benefits Policy?

Since the repeal of Schedule 7, which previously dealt with payments and benefits, the Scottish Housing Regulator has clarified that it is for RSLs to manage payments and benefits to its staff. However, there should be a clear policy in place to ensure propriety. In practice, many RSLs have adopted the SFHA model policy. It explains that, other than contractual entitlements and benefits such as salary, payment will only be made in exceptional circumstances. The policy envisages that payments can be made in a voluntary severance situation, but subject to a maximum of one year’s salary. 

It is also a stipulated condition that in the opinion of the RSL’s employment adviser, the proposed settlement sum should not exceed the total cost of the employee’s potential claims. So professional advice is important even if the proposed offer is less than the one year maximum.

The model policy also specifies that payment must be approved by the Governing Body. This is an important step. If approval has not already been obtained when the dialogue with the employee begins, it will be important to make sure that it is made clear in all discussions and written offers to the employee that the proposal is provisional and will be subject to the management committee’s ratification.

Governing Body Approval

It can be difficult to know when to seek committee approval for a proposed settlement. On one hand there can be reluctance to do it too early if it is not clear that the employee will agree to a negotiated departure. This might seem especially inappropriate if committee members know the employee and the approval request would inevitably require the disclosure of information about their performance or circumstances which would not usually be appropriate for sharing at that level. Indeed some members may have to hear an appeal against a future dismissal of the employee, and it would be less than ideal if they had previous knowledge of the matters.

On the other hand, the Committee’s approval should not be treated as a rubber stamping exercise, especially where there are big numbers at stake. Commonly the main principles of the agreement will be provisionally agreed by the time a paper is put to the Committee, but its conditionality on committee approval should be spelled out to the employee whenever the proposal is discussed.

What about OSCR?

If the RSL is a registered charity, board members will have to keep firmly in mind their duties as charity trustees including ensuring that the charity acts consistently with its purposes and with the appropriate level of care and diligence. Charities have been criticised on a number of occasions by the OSCR over the making of hefty discretionary payments to exiting employees.

How can committee members guard against the scope for criticism?

Preferably the whole committee should consider the proposal. It is not uncommon for Associations’ Scheme of Delegated Authorities to provide for the possibility of items being approved between Committee meetings by the Chair alone or a specified subcommittee.

However, OSCR published a report back in 2013 regarding the severance package agreed for a senior employee of Glasgow East Regeneration Agency. It concluded that the trustees were guilty of misconduct in the administration of the charity. Five out of 8 trustees had attended a meeting and had voted unanimously in favour of approving the proposed package. OSCR picked up on the importance of collective responsibility and accountability for the trustees. The three absent trustees didn’t appear to have even accessed the papers for the meeting they missed.

“All charity trustees are equally accountable for their organisations and the decisions taken in running it” explained the charities regulator, as well as pointing out that those unable to attend a meeting have a responsibility nonetheless to consider the papers and make their comments known so they can be taken into account. The report also emphasised the importance of taking professional advice as part of the duty to act with due care and diligence. Therefore RSLs with charitable status, even if constitutionally entitled to delegate approval, should think very carefully before doing so. This will be particularly so where the sum involved is large.

The Settlement Agreement itself

The deal that is usually reached with departing employees is that in exchange for the agreed settlement sum, they give up their rights to bring any claims against the organisation (with limited exceptions related to personal injury and pensions claims).

It will be important that the agreement itself is carefully drafted to give valid waivers of employment rights. Most statutory employment rights can only be given up in a settlement agreement which conforms to certain legislative requirements. To be valid, the employee will have to take independent legal advice on the agreement. Dusting off and recycling an old settlement agreement template used in another case therefore carries a big health warning!

If the settlement agreement is not adequately tailored there is a risk that there will not be reliable waivers of the correct claims. Further, as employment and tax laws evolve at a rapid pace, there is every chance an old agreement will be outdated and possibly ineffective as a result.

Get in touch

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