There are plenty of reasons why an employer might find themselves considering an employment settlement agreement with an employee. Settlement agreements are a useful tool in solving a dispute quickly, with certainty and finality.
A settlement agreement also allows employers to move forwards from an issue, without the headache of litigation hanging over them, not to mention the commercial and legal costs associated with litigation.
So, if an employer has made the decision to offer a settlement agreement the big question we always get asked by our clients is, how much? Claire Rosney, Senior Employment Lawyer at Vista answers that question below.
How much should employers pay on a settlement agreement?
This might not be the answer our readers are looking for, but there is no absolute science behind calculating the amount for any individual settlement agreement. The first question that we always ask is, what has lead an employer to this decision?
The reason we start here is that there are multiple situations that might trigger the decision, all which require slightly different considerations. Broadly, we experience four scenarios…
Scenario one – there is a disciplinary issue
So, employers are in the midst of dealing with a disciplinary issue for potential gross misconduct, and when it comes to the disciplinary hearing the employee decides they would rather not have a dismissal on their record and asks for an alternative arrangement.
The best way to approach this situation is to understand what the statutory minimum entitlements that an employer has to pay in order to part company. Employers might consider offering one or two weeks’ pay, or even notice pay. Remember that with gross misconduct the employee is entitled to their salary to dismissal, plus any accrued holidays. Therefore, anything over and above this could be offered as part of the settlement agreement. Employers might also wish to consider agreeing a reference with the employee.
Scenario two – there are performance issues
Dealing with performance issues can be complex and time consuming. Often parties will agree not to make the investment in the performance management procedure and agree to part company through a settlement agreement.
In this situation, employers must think about what their employee is entitled to receive. This will include notice pay and accrued holidays. Then they could think about the time taken to go through the performance management procedure and offer the equivalent salary as the settlement amount. This could be anything from two to four weeks, or three to four months depending on the seniority of the employee.
Scenario three – the employee isn’t the right person for the role
This scenario could have many different faces – it’s just not working out, there is a significant personality clash, or they just aren’t the right person for the team.
When entering a settlement agreement in this situation, employers will need to think about notice pay and holiday entitlement, plus they could then consider something equivalent to a statutory redundancy payment or an enhanced redundancy payment as an incentive for entering into the agreement. This depends on how big the issue is, and how quickly employers want to resolve the matter.
Scenario four – complex, messy cases
In other words, it just needs sorting – and quick. In this situation employers might be at risk of tribunal proceedings, so it’s always a really good idea to think about if the employee did take the case to the tribunal and won, what the likely level of award would be.
Employers also need to factor in the commercial costs to the business of dealing with the tribunal process, plus any legal fees incurred.
Employers can also apply a risk percentage to take account of the chances of them succeeding.
Lastly and probably most simply, employers might just want the problem to go away. Therefore, it’s just a case of how much the employer is willing to pay to get the problem off their desks.
So, lots of things to think about and no two cases are the same. If you are thinking about entering in to a settlement agreement with an employee, you might also need to consider paying for your employees legal advice, potentially agreeing a reference and the complexity of confidentiality agreements. We tackle those questions in another post.