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Severance: Should employers use a settlement agreement?

Severance: Should employers use a settlement agreement?

It is commonplace to negotiate severance terms before an employee leaves employment due to redundancy. Discussions usually agree the sums to be paid and formal settlement agreements are signed to create a clean break between the parties.

Chris Dobbs, Solicitor in our Employment Team, discusses a recent case where two parties had different ideas about what had been agreed, as well as what could be enforced in a settlement agreement.

What is a settlementagreement?

Settlement Agreements are legally binding contracts which are signed between an employee and employer. They settle claims which an employee may have arising from their employment such as pay claims or discrimination, or claims following termination of employment such as unfair dismissal.

I have previously written about employment settlement agreements, where I provided a more in-depth guide of what they are and when they can be used. You can read that article here.

Evergreen Timber Frames v Harrington

In Evergreen Timber Frames v Harrington, the employee worked for the employer as a manager. He was told he was at risk of redundancy and his severance terms were discussed over several months.

Before his dismissal, the employer wrote setting out the amounts that the employee would be paid on termination if he worked his notice and said they would like to ‘gift’ him a car.

The employee wrote back (via an appeal letter) accepting the gift of the car but querying the redundancy calculation and complaining that they had agreed in verbal discussions that the company would also give him a computer and a month’s pay as a bonus.

Alleged breach of severance contract

When the car was not transferred on termination, the employee then brought claims for breach of contract. The employment tribunal upheld part of his claim relating to the car, saying an agreement had been reached for its transfer as part of the severance package.

It had been offered in the employer’s letter and accepted in the employee’s appeal letter. They awarded him £8400, representing its value. The employer appealed.

How to negotiate severance pay

The EAT agreed with the employer. Termination discussions often involve back and forth conversations about different elements of the overall package. Negotiations would become too complicated if it were possible to hive off and accept one part of a deal whilst rejecting or trying to improve on other parts of it.

In this case, the car was not a standalone promise but one part of a wider termination package. The employee’s letter of appeal was not acceptance of part of a deal but a counter-offer to improve the severance terms overall.

The matter was sent back to a fresh tribunal on another point (to decide whether there had been a deal struck at a previous meeting to transfer the car in return for doing specific work during the employee’s notice period).

Why use a settlement agreement?

This case shows the importance of agreed written terms when employment is being terminated. The confusion in this case could have been avoided if the employer had used a settlement agreement.

The discussions about its terms would have been frontloaded and confusion ironed out at an earlier stage. Settlement agreements have the added benefit of settling outstanding claims, meaning there is a clean break on termination and the certainty that there will be no future litigation.

An Employment Solicitor's View

Chris Dobbs said "Settlement agreements are one of the safest ways to ensure that a termination other than in accordance with a standard procedure is resolved fully in law. The Evergreen case demonstrates the dangers in not making sure that all matters arising from a termination like this are dealt with in writing and that there is a complete and clean break of the relationship.

Remember that an employee must take independent legal advice on the terms and effects of a settlement agreement. This protects not just them but also the employer who wants assurance that they will not be faced with an unexpected claim."

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