Managing Settlement Agreements

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Managing Settlement Agreements

2018-08-30T20:00:55+00:00 August 30th, 2018|All, HR News, News|

Designing an approach to settlement negotiations

Sometimes, one side or other in an employment relationship will begin to feel that the relationship has run its course. This feeling could arise from a specific dispute, or the relationship may have deteriorated to the point where it is difficult to imagine it ever recovering. In these situations it is possible, as an alternative to standard HR and employment tribunal processes, to reach a mutual agreement on ending the employment relationship.

Settlement negotiations can be opened by the employee, but more often it will be the employer that suggests a settlement. These negotiations are among the most difficult conversations an HR practitioner can have. Although there are instances in which an employee is amenable to settlement and the process can run quite smoothly, our primary focus is on negotiating a settlement with an employee who is initially resistant to the process.

Reference will be made throughout this guide to the importance of treating employees with respect, and working hard to ensure that the tone of the discussions remains adult to adult, rather than adult to child. When you suggest to somebody that you would like to talk about ending their employment, their thoughts will immediately turn to their mortgage, their partner, their children and so on, and they’re likely to become emotional. As far as is possible, the role of the HR practitioner is to create a sense of partnership with the employee and to work with them to find mutually agreeable terms.

Each case will turn on its own facts, but the important thing to remember is that the company and the individual are working together to reach a mutually agreeable outcome – and that means that both sides will have to be prepared to compromise.

Relevant legislation

The important legislation covering settlement agreements and discussions can be found under section 111A of the Employment Rights Act 1996. The forerunner to the settlement agreement was the old ‘compromise agreement’ approach, which assumed there was a pre-existing dispute. By contrast, settlement agreements can be entered into on a ‘without prejudice’ basis, even where no employment dispute exists.

In this context, ‘without prejudice’ simply means that the existence of the discussions cannot be used as evidence in any claim for unfair dismissal. Acas’ Code of Practice on Settlement Agreements and its booklet Settlement Agreements: A Guide set out more factual detail on this change. The key point to note is that, as long as settlement negotiations are approached professionally and properly, organisations can suggest settlements and negotiate with employees even if no other action has been taken.

The role of HR

Neither the law nor Acas is specific about who should open an organisation’s settlement negotiations. Although you will take your own view, there is real benefit in the negotiation being started by somebody who has not previously been involved with the employee.

A successful negotiation will require that the conversation moves beyond who is right and who is wrong, and instead focuses on ‘agreeing to disagree.’ A manager who has worked with the employee may find that difficult, and the employee may negotiate more easily with someone who has had no involvement in their workplace issues or relationships.

As HR practitioners, we have expert people skills, and so may well be best placed to negotiate these agreements. As noted above, these conversations can be very difficult and there are countless areas of risk where managers who are not experts in this field can make costly and dangerous mistakes.

Approaching the settlement discussion

The first challenge is to open the way for an initial conversation with the employee. To that end, it can be useful for the manager to suggest to the employee that they speak to HR about other options that may be available to them. There are two good reasons for advising the manager to keep this conversation brief:

  • the manager is less likely to say something they shouldn’t
  • the employee is likely to want to have the meeting with HR to satisfy their curiosity.

It is sometimes easier if the manager gives the employee your contact details and asks them to get in touch with you.

The rest of this guide assumes that the individual contacts you. If they don’t, it is difficult to push any further. It’s true that you can follow up with the employee because you were expecting to hear from them, but there is little you can safely do to force the point. It is vital that employees do not feel pushed into settlement negotiations against their will because this can jeopardise both the ‘without prejudice’ nature of any discussion and the protections under section 111A.

Your initial contact with the employee is your first opportunity to impress them with your professionalism. Thank them for contacting you and offer them as much flexibility as you can about when and where the meeting takes place. You may be asked to provide something in writing first before a meeting, or it may be that the employee would rather not meet you at all (for example, they’d rather have a phone call or email exchange). You should resist attempts to avoid face-to-face contact.

These conversations are so sensitive that you really do need to be in the same room as the employee. You will need to read them as you talk to them, react to their body language, and possibly deal with emotional reactions.

The ideal location for the meeting is a private, comfortable space. A larger room is better than a smaller one, and a tidy one with a good temperature and fresh air will make the meeting easier for both parties. Take some time before the meeting to gather your own thoughts, think through what you want to say, and what you want to learn from the employee. Settlement negotiations are not meetings that you want to be going straight into from another meeting. Have water to hand and ensure that you have enough time. Cutting settlement negotiations short can be very hard on the employee and damaging to good will. Block out enough time in your diary for the conversation to take twice as long as you think it will.

Preparing your negotiation strategy

Once you know that you will be meeting the individual, it’s a good idea to begin thinking about what your opening offer might be. Depending on how the conversation with the employee goes, you may or may not choose to share those details at the first meeting. It will be useful to know what your opening offer will be in any case, as it will inform the questions you ask the employee and how you react to their initial expectations.

The key elements of a settlement agreement will usually be:

  • a compensation payment (the first £30,000 of which is usually tax-free)
  • an agreed exit date
  • a contribution to the employee’s legal fees
  • an agreed factual reference
  • arrangements relating to company property, intellectual property and so on
  • a ‘reaffirmation’ letter if there is going to be a period of employment between the date the agreement is signed and the date the individual leaves. This letter records the fact that nothing has changed in that final period of employment that is not covered by the settlement agreement.

The compensation figure will not be based on any kind of formula and could be anything at all. Sometimes people will think about how long it might take an employee to find another job and offer something comparable to the salary they would have earned in that period.

For example, if you think it might take them up to three months to find another role, and that they would have earned £10,000 net in that period, you may think about an offer around that number. Alternatively, you might think about what your own legal costs would be should you get further into dispute with the employee, and take a commercial view on what it might be worth offering to avoid that.

There will also be cases in which disciplinary or capability processes have already started that may result in the employee’s dismissal anyway. Your opening offer might be small in those cases. It is even possible to offer a compensation payment of ‘zero’ if an agreed exit date and a factual reference is valuable enough to an employee that they will find that attractive.

For a settlement agreement to be legal, the employee must receive independent advice from a lawyer or a certified representative of a trade union or advice centre worker. To recognise this, the employer usually offers to make a contribution to the employee’s legal fees. It is even possible to arrange for the lawyer to invoice you directly up to the maximum value you include in the agreement. The amount offered varies by region, sector and seniority of the staff member involved.

The employer could agree to a contribution in the range of £250 at the low end, or up to £1,000 or £2,000 at the higher end. In most cases the offer is around £350 to £500. If the employee chooses to use a very expensive lawyer, they can pay any additional charges.

Managing the negotiation meeting

When you meet the employee it is important to explain the process. Do not underestimate how daunting this meeting can be for them. They are likely to be nervous and those nerves will manifest themselves in different ways depending on the person. Some people might be very quiet, others angry, others argumentative. Be forgiving and understanding. Patience at this stage will help to build the crucial rapport with the individual that you will need to complete a successful negotiation.

The first point you will want to make is that you want to talk to the individual about an option that might be available to them. You will also want to stress that this is an option that they can explore should they choose to. If they are not interested, the conversation need go no further. If they would like to explore this option they can do so on a zero-commitment basis. All the way through to reaching and signing an agreement, an individual can change their minds, and it is worth giving them a flavour of that at this stage.

Depending on the individual, you can also acknowledge at this point that the conversation might be a difficult one. As well as acknowledging that it will be difficult for the individual, don’t be afraid to acknowledge that you may also find it difficult. You need to create a sense that the two of you are equals in this conversation and are working through it together. Reassure the individual that if at any point they feel uncomfortable or want a break that that’s fine, and try to find somewhere you can direct them to where they’ll be able to compose themselves.

It is also important to be aware of your body language. You need to present yourself as being open, interested in listening to them, and non-threatening. For this conversation to go well, you need the person you are working with to relax as much as possible and your body language can be as important as the words you say in achieving that.

If the individual is interested in having the conversation it can be helpful to take a step back and introduce the concept of a settlement agreement to them. Stress that this is a no-blame option. It is a mutually agreed way of exploring options for bringing the employment relationship to an end, and possibly agreeing to one of those options. As well as explaining that there is a legal basis for this, it is helpful to explain the main elements of an agreement.

Even if you think you sound like a broken record, it is worth checking again that the individual is comfortable having this conversation. Invite them to take notes and explain that they can contact you directly if they think of other questions later. It is a very good idea to have a single point of contact for the individual on all points relating to a settlement agreement. Make sure they have your contact details, and that they can reach you directly without having to go through a PA or a colleague.

After the meeting

It may be that the individual decides that what you have told them is interesting, but they want to go away and think about it. It may be that they want to continue the conversation. It is often the case that an individual wants to tell you (often in great detail) about their concerns and complain about their colleagues and managers or the organisation more broadly. If this is the case, listen patiently but gently encourage the individual to think about what they would like the future to look like, rather than focus on the past. This is an opportunity to move on and make a fresh start.

You may choose to share your initial offer with the individual at this stage. Alternatively, you may ask them what they would be looking for, so you can go away and think about it. There is value in being seen as somebody who genuinely wants to hear what the other side wants and who will go away and do their best to secure it. It can be a very helpful negotiating strategy to make yourself the ‘go between’ who works with both the employee and the person who needs to approve any offer. In this way, you can operate as an ‘honest’ broker who is just trying to facilitate a mutually acceptable position.

The first meeting is also an opportunity to demonstrate that you want to be transparent. If they are a trade union member, encourage the individual to speak to their union about the conversation. If they aren’t a member, make them aware of Acas and the free helpline where they can access independent information about settlement agreements and the process.

At the end of the meeting, thank the employee for taking the time to meet you, check again that they have your direct contact details, and agree next steps. Once they have left the room, it is excellent practice to write your own contemporaneous note of what was said for future reference.

Don’t give the individual a deadline for coming back to you if you have the option. There are different views on this, but avoiding a hard deadline has advantages for both parties.

You do need the process to feel like something that the individual has some control over. It is sometimes useful to say that while there is no deadline, neither is there a guarantee that the offer will be on the table forever. You want the individual to think of you as a pragmatist, so arbitrary rules and deadlines are best avoided.

Preparing the draft

Where you are able to reach an in principle agreement with somebody (this may follow a period of negotiation with them directly, with their lawyer or with their trade union representative) you will be in a position to prepare a draft agreement. Although there is a requirement that the agreement records details of who has given advice to the individual, there is no requirement for the employer to show that they have accessed legal advice.

Other issues to be aware of:

This guide is not intended to be exhaustive; the nature of settlement negotiations is such that there are countless variables and issues that might arise. The key ones to be aware of are:

Covert recordings

It is not unusual for an individual to use smart phones or other technology to record settlement negotiations. Always assume you are being recorded and remain professional throughout.

Tax issues

There are scenarios in which there may be a tax liability on compensation payments. Two of the most common are where an individual has a ‘pay in lieu of notice’ clause in their contract and paying them a lump sum tax-free may be seen as avoiding the tax that would be due on that notice pay. Another is where an individual is intending to go straight from employment into retirement. The safest position is to use a template agreement that ensures an individual indemnifies you against any future tax liability. This does not completely remove the problem, so the advice of an appropriately qualified financial advisor or accountant can be valuable. It is also important that any payments in respect of untaken annual leave are taxed appropriately.

Confidentiality clauses

Although most settlement agreements will include confidentiality clauses, in reality they are almost impossible to enforce. For that reason, avoid spending too much time negotiating the exact wording of clauses of that type.

‘No bad mouthing’ letters

Employees are sometimes concerned that after they leave, their former colleagues will be openly critical of them (either within or outside the organisation). You can agree to write to named employees instructing them not to make any disparaging comments about the individual or face disciplinary action. It’s always best to resist this approach. The main issue is that it makes it obvious to any recipient of the letters that a settlement agreement has been reached, and in truth can be so provocative that it will increase rather than reduce the risk of bad-mouthing.

Exaggerated references

Employees will sometimes propose that they are provided with an over-the-top personal reference as part of the settlement agreement, and if you’re asked for a gilded reference you must refuse. Factual references are fine, but you should not agree to do anything designed to mislead an individual’s future employers.

Trade union representatives and lawyers

It can sometimes be much easier to negotiate directly with an individual’s representative once you have a written draft to discuss. Don’t be afraid to do this, as they are often very skilled and experienced in working through difficult issues and finding solutions.

For more information and guidance, contact our team of HR Consultants at aspire cambridge today on 01223 855441.