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By Spencers Solicitors

  Spencers Solicitors    
  May 20, 2020

Is there likely to be a surge in the use of settlement agreements as a result of COVID-19?

Hands up (and be honest about this) if you’d never heard of the word ‘furlough’ or its present participle ‘furloughing’ before March of this year?

Settlement Agreements

No? Don’t worry, you aren’t alone. In fact, you’ll be in a very large majority.

A month is a long time. Longer than usual too, at the moment. By now we’ve all heard the word ‘furlough ‘and have some idea what it means at least.

The dictionary definition of furlough is: ‘to allow or force someone to be absent temporarily from work.’

On the 20th March the Government announced an employee furlough scheme as a result of which businesses that decided to furlough staff (as opposed to making them redundant) would be eligible to apply for a grant to cover up to 80% of the wages of furloughed staff, up to a total of £2500 per month for each furloughed staff member.

On the first day that the scheme opened its virtual doors for applications for furlough related funding, 140,000 companies applied. On the 12th May, the Chancellor, Rishi Sunak announced that the scheme would remain open until the end of October.

The Government’s reasoning behind the scheme has been to try and persuade company bosses, not to instinctively make employees redundant but to offer the breathing space that furloughing permits. The hope is that when the crisis is over, many of those furloughed will be offered their jobs back. In this difficult climate, many employers will be taking stock of their businesses. Will they still be viable and if so in what form? With a reduced workforce or ‘as normal’? If the former, should they take the opportunity to let some of those furloughed go permanently? Or have some of those working from home, not shown all that would have been expected of them?

Some furloughed employees may be smarting from the fact that they were chosen for furloughing. Does the boss not rate them? Do they really want to go back to work for their employer anyway? Is it time for a career change?

What is almost certain is that the crisis will cause more job losses. There is the distinct possibility that we may see a real surge in the use of settlement agreements as a means of bringing to an end many contracts of employment.

Settlement Agreements – what are they?

A Settlement Agreement is a written contract between an employer and an employee which lays down the terms upon which an employee’s contract of employment is being brought to an end. Once entered into, it is legally binding.

They are often used to bring to an end a contract of employment, without the employer going down the route of making the employee redundant or risking a claim being made against the company by the employee, for wrongful dismissal or discrimination.

In almost all cases they will include a lump sum payment being made by the employer to the employee, that is more favourable to the worker than redundancy payments would have been. Where possible claims for unfair dismissal or for discrimination have been intimated by the employee, the employer may decide to offer a favourable lump sum payment to stop any such claim in its tracks.

By signing a settlement agreement, the employee:

  1. Agrees that their employment with the employer is at an end
  2. Receives a sum of money (termination sum)
  3. Agrees that they will not sue the employer for any reason relating to their employment

Why might there be a surge in the use of Settlement Agreements because of the COVID crisis?

Trying to predict what will happen tomorrow, is impossible to do with anything like a degree of certainty in this new world that we are all living in. However, when the dust does finally settle, it is hard to believe that it will be completely business as usual for anything but a relatively small number of companies.

Many businesses that are still able to continue to ply their trade, will be doing so only on condition of internal restructuring.

This inevitably means that further down the line more employees will lose their jobs.

In many of those situations, Settlement Agreements may be seen by both parties as the most amicable, the cleanest and the most suitable method of bringing the working relationship to an end, particularly where employers have come to the decision to part with employees who have been with the company for a considerable number of years.

The COVID crisis has already proved mentally draining for large swathes of the population and we have only been in lock down for a month, at the time of writing. As time progresses, neither side to any potential ending of the employment relationship are likely to relish an acrimonious or long drawn out ending. Settlement Agreements may come into their own, in these circumstances.

For employees, it is a legal requirement to obtain advice from an independent advisor solicitor before entering into a Settlement Agreement. It is standard practice for employers to contribute to the employee’s costs of consulting a solicitor. This usually results in the employee having nothing to pay out of their own pocket.

For employers, although not obligatory, it’s still advisable to seek legal advice. Put simply, if during the negotiations to reach a settlement, something goes wrong because tempers become frayed, the alternative outcome may be that the employee decides to go to an employment tribunal instead . Since avoiding this was one of the main reasons for the employer to engage in settlement agreement negotiation, it somewhat defeats the object.


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