Settlement agreement or redundancy consultation process – which way to go?

In the current economic climate, businesses across the UK are facing financial strain, resulting in downsizing and cost cutting exercises and the requirement for difficult decisions to ensure their survival and sustainability.

Some businesses may ultimately find themselves with no choice but to make staff redundancies and we have seen an increased number of redundancy situations in recent months.

Some employers will choose to use settlement agreements as a way of mutually parting ways with an employee in a redundancy situation, whereas others will either be compelled (by collective agreement or otherwise) to choose to commence a redundancy consultation process with their workforce. Whether the employer takes the settlement agreement route or the redundancy consultation process route will depend on a number of factors.  Here, we set out some key tips for businesses faced with the question of how best to reduce their headcount.

Voluntary redundancy – is it still an option?

Although still relatively common, we don’t come across voluntary redundancy situations as much as we once did. There may be a number of reasons for that, including a general reduction in large scale workforces where a number of employees are employed to do the same role, meaning that in a simple headcutting exercise, it is easy to offer voluntary redundancy for a limited number of employees.

Nevertheless, voluntary redundancy is still a useful tool in the HR practitioner’s toolbox and it can be used as a way of avoiding significant disruption to the workforce, including diverting the attention of senior managers and workers alike from the core activities of the business.

These days, where an employer offers voluntary redundancy, in an effort to make the offer attractive to the employee, the financial package is usually an enhancement on what the employee might otherwise receive in compensation. As such, it is generally accompanied by a settlement agreement.

What is a settlement agreement?

A settlement agreement is a legally binding document which outlines the terms and conditions relating to the termination of employment. Under the agreement, the employee will agree to waive their rights to pursue a claim against their employer for loss of employment in return for certain benefits (which are most often financial compensation).

Even where the redundancy is compulsory rather than voluntary, employers will often offer an enhanced package to redundant employees, often with a view to minimising hardship and sometimes to short-circuit the necessary redundancy consultation process.

Settlement agreements offer employers the opportunity to reduce headcount while at the same time minimising disruption to the core business activities and substantially lowering the risk of claims by disgruntled employees. In order to protect employees, the law requires employees to receive independent legal advice on the terms and effect of the settlement agreement for it to be legally binding on both parties.

What is a redundancy consultation process and how long does it take?

Amongst other things, redundancy occurs where there is a workplace closure or a reduced need for particular work to be carried out. Redundancy is a potentially fair reason for dismissal, however, employers must follow a fair consultation and selection process which involves:

• Informing staff that their role is at risk of redundancy and consulting with them to consider whether redundancy can be avoided (e.g., by changing working hours);
• Applying fair and objective selection criteria where a reduction in headcount is to occur; and
• Offering suitable alternative employment if it is available

Depending on the size of workforce and, in particular, the number of potentially affected employees, a redundancy consultation process can take several weeks, with the corresponding loss of productivity in the core business activities.

As an employer faced with the prospect of downsizing or closing a workforce, it is always a good idea to consider the options and whether settlement agreements might offer an attractive alternative to a redundancy consultation process (or part of it). Contact our team of employment law experts who can guide you further.

This update contains general information only and does not constitute legal or other professional advice.