Pre-termination negotiations and settlement agreements: the 2015 XpertHR survey
Author: Sarah Welfare
Latest XpertHR research, covering 471 organisations employing more than one million people, examines when, why and how settlement agreements are used by employers to facilitate employee departures.
This summary report covers key findings from the 2015 survey on settlement agreements, and focuses on when agreements are most likely to be used and their frequency.
- the terms and conditions of an agreement;
- key factors used to determine the size of the financial settlement; and
- resources used to prepare settlement agreements.
On 29 July 2013, a new legal framework came into effect extending an employer's ability to have "protected conversations" with employees in certain circumstances, with a view to ending the employment relationship. Also, compromise agreements were renamed settlement agreements.
Employers' experiences of the new legal regime surrounding pre-termination negotiations have largely been positive, according to our survey respondents, although the majority say that it has had no impact on their organisation's practices, and most use settlement agreements only very occasionally.
Employers' approaches to using settlement agreements
The vast majority of employers would consider using a settlement agreement in principle, although most use them rarely rather than routinely, our survey finds. Four-fifths (82.2%) of employers state that such agreements are/may be used in certain cases and one in eight (12.7%) say that they are "routinely" used to facilitate employee departures. Only a small minority (5.1%) of respondents say that they are not used by their organisation. Results also vary by size of organisation - 9.2% of small employers (with fewer than 250 employees) state that they do not use settlement agreements, compared with just 0.8% of large organisations (with more than 1,000 employees).
When those that did not use settlement agreements were asked for their reasons, employers either said that the occasion to use them had not arisen (62.5%) or that they were unable or unwilling to fund any sort of financial settlement (41.7%). Four organisations said that settlement agreements were "against the ethos or values of their organisation".
Circumstances in which settlement agreements are used
Asked in which specific circumstances their employer would consider using a settlement agreement (see chart 1, below), the largest number of respondents selected "a professional disagreement or relationship breakdown between employee and employer", followed by "senior executive departures". There were some significant differences by sector. In the public sector, the most common reason given for their use was where the costs of preparing for a tribunal claim would outweigh the costs of settlement (79.3%). In the private sector, however, senior executive departures and professional disagreements or relationship breakdown between employer and employee were the most common circumstances.
Chart 1: Circumstances in which employers would consider using a settlement agreement
n = 471.
Frequency of use
More than four-fifths (83%) of employers had signed one or more settlement agreements during the past 12 months, while 14.5% had not used any. More public-sector employers (89.7%) than manufacturing firms (76.7%) had signed one or more in the past 12 months.
The median number of times that a settlement agreement had been signed was three and the mean was 8.75. Not all employers were able to give a number of settlement agreements signed, but, of the 347 that did so, the number of settlements made represented 0.3% of their total employees.
When the number of settlement agreements used is calculated as a percentage of the total stated workforce of each employer, for more than half (52.4%) of employers this percentage is 1% or lower. A small proportion (4.9%) have signed a number of settlement agreements that represent 10% or more of their total workforce figure, but most of these are small employers that may have signed two agreements from a workforce of 10, for example.
Only eight out of 347 employers (2.3%) signed 50 or more settlement agreements in the past year, with the average number of people employed by these eight organisations standing at more than 26,000.
How often do employees propose an agreement?
Our survey shows that it is quite common for an organisation to be approached by an employee to propose a settlement agreement. One or more employees have proposed using a settlement agreement at almost one in three (32%) organisations over the past 12 months. This is much more likely to be the case at large organisations (with 1,000 or more employees), where more than half (50.8%) of employers reported that an employee had done so. Only one in five (21.8%) small organisations said that an employee had proposed a settlement agreement over the past year.
The settlement agreement process
Employers were asked to state the minimum number of days that an employee would normally be given to consider the offer when their organisation had proposed a settlement agreement. The Acas Code of Practice acknowledges that this will depend on the circumstances of each case, but recommends that a minimum of 10 calendar days should usually be given for the employee to consider the proposal and seek legal advice.
While almost half (47%) of employers surveyed give the employee a minimum of 10 days or more to consider a settlement offer, a majority of employers usually ask the employee to respond more quickly. The median number of days allowed was seven, which was also the most common number of days cited (by 29% of employers). A small proportion (6.7%) give employees three days or fewer to consider a proposed settlement.
It is common for organisations to allow the employee to be accompanied by a colleague or trade union representative at any meetings relating to either pre-termination negotiations or a settlement agreement, with 42.6% of respondents stating that this is always permitted (rising to 63.8% among public-sector employers). However, at one in three (31.3%) organisations it is not permitted, while a further quarter (26.1%) decide this on a case-by-case basis. A number of employers noted that this had never been requested by an employee, while some said that if a representative was already involved, then they would expect that involvement to continue.
When asked if any employee had refused to accept a proposed settlement over the past 12 months, 12.5% of employers reported that this had been the case on at least one occasion. Of the 53 employers who supplied details on what happened after an employee's refusal, outcomes included:
- the continuation of disciplinary, redundancy, absence or performance procedures that were already in motion;
- the employee resigning and lodging a tribunal claim (with various outcomes - in one case, the employer won at tribunal, in another the employee ended up settling for less than what had originally been offered);
- the employer increasing the offer in one case;
- the employee continuing to work as normal; or
- the employee being eventually dismissed in line with the organisation's procedures.
What do settlement agreements cover?
We asked employers what settlement agreements usually covered at their organisation, besides any standard clauses such as a list of claims, the name of the employee's legal adviser or the employment end date. The results (see table 1) show that a confidentiality clause governing the content of the settlement agreement was most commonly selected by employers (92.8%), while almost all employers agreed something in writing on the wording or content of references (87%).
Many organisations (69.5%) selected a financial settlement as something included within a settlement agreement, but it is possible that some organisations' agreements might include payment for a lengthy notice period, for example, that the employee does not have to work, rather than an additional sum. Very few employers selected neither a financial settlement, nor payment in lieu of notice.
Other issues mentioned by employers as included in agreements are:
- an agreed internal announcement regarding the employee's departure;
- wording on tax liabilities;
- provision for outplacement help;
- return of company car (where applicable) by a certain date and in good condition; and
- a commitment not to seek re-employment with the organisation and specific compromise of all future claims arising from future refusal to consider application for employment.
Table 1: Issues/terms covered in settlement agreements
|Term or issue covered||% of employers|
|Confidentiality clause - non-disclosure of the contents of the settlement agreement||92.8|
|Agreement on wording or content of references||87.0|
|Return of company/organisation property||85.4|
|Payment in lieu of notice||79.1|
|Financial settlement in addition to any payment||69.5|
|Non-derogatory clause (agreement not to make derogatory statements about employer/employee)||67.9|
|Clause stating any financial settlement will be repayable if settlement is breached||63.9|
|Partial payment of employee's legal fees||62.3|
|Reason for termination (where appropriate)||52.9|
|Post-termination restrictive covenants to protect the business of the employer||52.2|
|Specific wording on annual leave, bonus or other relevant benefits owed||52.0|
|Confidentiality clause - wider issues (eg to prevent an employee from speaking about their job at the organisation)||44.2|
|A commitment to give no less favourable oral references in future than the agreed reference||41.0|
|Waive rights to personal injury claim||39.5|
|Full payment of employee's legal fees||29.6|
|Requirement for employee to transfer his or her shares in the company (where relevant)||8.7|
|n = 446.
Of the 310 employers who said that they would normally include a financial sum under a compromise agreement, in addition to anything due to the employee under their contract, six in ten (60.6%) said that HR would take the lead in deciding or negotiating the size of this sum. At a further quarter (24.2%) of organisations, a senior executive or manager took the lead, while a smaller proportion (8.4%) said that their in-house or external lawyers would lead the process. Very few (1.6%) selected the line manager as the person who would take the lead, but some said that the line manager and HR would work together, securing budget approval from finance or senior managers.
Deciding the amount of a financial settlement
Employers were asked to choose from a list of factors that might play a part in determining the size of any financial settlement, then to choose up to three of these that were the most important (see chart 2, below). The specific reasons for offering a settlement are the most important determinant (selected by 60% of employers), although negotiations with the employee (55.5%) also influence the amount of a settlement in the majority of cases, as does reflecting the potential costs of a tribunal claim should settlement not be reached.
A number of employers commented that the starting point for settlement-agreement awards is usually what the employee would have received if they have been made redundant, in accordance with the organisation's redundancy policy.
Chart 2: Factors determining any financial settlement
n = 310.
Advice and guidance used
When asked about the resources and advice that they use in managing and finalising settlement agreements (see chart 3, below), a large majority (79.6%) of employers say that they use external legal advisers, considerably more than the proportion (18.6%) that use in-house legal assistance. The July 2013 Acas Code of Practice on Settlement Agreements is also widely used, with almost half (48.5%) of respondents selecting this option from the list.
Chart 3: Sources of advice and guidance used by employers
n = 441.
Pre-termination and settlement agreements
We asked employers to express their opinions on a number of statements about some of the key issues surrounding pre-termination negotiations and settlement agreements.
More than one in four HR professionals (26.6%) feel that the introduction of tribunal fees from 29 July 2013, which has caused the number of tribunal claims to fall dramatically, has "reduced the need for pre-termination negotiations and settlement agreements", although half (49.4%) do not agree that this is the case.
Settlement agreements are sometimes in the news in the context of whistleblowing, particularly in the NHS as highlighted by the public inquiry into failings at Mid Staffordshire NHS Foundation Trust. Asked whether or not they felt that their organisation had a tendency to use settlement agreements to "gag" employees who may have legitimate concerns about organisational practices, a reassuring 89.5% disagreed, although a small minority (6%) expressed agreement (8.9% of organisations with 1,000 or more employees).
There was some concern expressed that the option of settlement agreements can "disincentivise employers from using proper HR practices and procedures", with more than one in four employers (28.5%) agreeing that this was the case, although the majority (66.7%) disagreed with this statement.
Current legal framework
Asked for their opinions on what is wrong with the legislative framework, by far the biggest complaint was that there was a lack of clarity over the extent to which the content of pre-termination conversations was really inadmissible at tribunal, in order to enable "sensible and frank" conversations. However, these comments were outnumbered by those employers noting that the system seemed to work "fairly well" in their organisation.
Others noted that they were satisfied that they had previously used "without prejudice" conversations in a practical way, meaning that the ability to have "protected conversations" had made little practical difference. Overall, it seems that the majority of employers are either neutral about the new framework (many of whom have not yet had cause to use it) or broadly content with it, with the majority feeling that there has been no major change either in the legislative framework or how their organisation manages these - usually fairly rare - cases in practice.
This report is based on original research carried out online in January and February 2015. Responses were received from 471 HR practitioners working in organisations employing 1,158,067 people. The breakdown by economic sector is as follows:
- 322 (68.4%) are in private-sector services;
- 89 (18.9%) are in manufacturing and production; and
- 60 (12.7%) are in the public sector.
Broken down by workforce size, the respondent organisations comprise:
- 207 (44%) with between one and 249 employees;
- 139 (29.5%) employing between 250 and 999; and
- 125 (26.5%) with 1,000 or more.
The smallest organisation employs seven and the largest employs 160,000 people. The median number employed is 300.
What should I do now?
- Understand how to use settlement agreements in practice by reading How to > How to use a settlement agreement to resolve an employment issue.
- Read information relating to pre-termination negotiations and settlement agreements, such as Policies and documents > Model settlement agreement.
- Check out the guidance on pre-termination negotiations and settlement agreements in Employment law manual > Alternative methods of dispute resolution.
- See XpertHR's benchmarking service to access the full data on all the questions from our survey on settlement agreements.