10 top tips for negotiating a redundancy settlement agreement, for employers and employees

Redundancies are increasingly becoming a reality for both businesses and employees. We are seeing a notable rise in the use of settlement agreements, as employers seek to establish fair and mutually agreeable terms when managing redundancies, while reducing legal risk. However, this process can be complex, and any misstep in either the negotiations or the drafting of the agreement can quickly derail progress.

Against this backdrop, we have compiled our top 10 tips for drafting and negotiating settlement agreements, designed to support both employers and employees navigating this challenging situation.

For Employers

The goal is usually to manage legal risk, control costs and protect the organisation’s reputation while reaching a clean exit. Our top 10, practical tips for businesses are:

1. Seek legal advice early

Perhaps unsurprisingly, we really do recommend that employers going through a redundancy situation, or in discussions regarding a settlement agreement obtains legal advice early on. This enables employers to understand the risk, options and talk through strategy before it is implemented. Even with experienced managers and HR support, sometimes it takes an outside perspective to offer insight and move negotiations forward. It can also be useful to ensure any template documentation you might have remains up to date.

Seeking advice early, before concessions or comments have been made that may not be in the business’ best interest is essential. It is difficult to roll back a situation that has advanced too far, where cards have already been laid on the table, so engaging legal expertise early can make sure that rights and interests are protected.

A note on legal fee contributions for the employee too. While it can be tempting to include only a minimal legal fee contribution to keep costs down, with legal fees rising it can be sensible to offer a slightly higher rate (or be open to doing so), to ensure the employee does obtain proper advice as this can expedite the process and minimise the issues in dispute. In practice, where minimal fee contributions are given, the employee may be tempted to try and manage the process themselves and this often makes things more difficult to manage.

2. Be clear on your objectives up front

Decide what matters most:

• Minimising cost
• Agreeing terms swiftly, for example, if there is pressure to finalise any restructure plan
• Avoiding the risk of Tribunal claims
• Protecting confidential information and enforcement of restrictive covenants
• Maintaining reputation

Being clear on the key objectives helps prioritise where to concede and where to hold firm in negotiations.

3. Consider the timing

In some cases, the main benefit of a redundancy settlement agreement for a business will be to agree quick terms and avoid the management time that following a full consultation process would take up, together with the uncertainty a process like this can create for other employees.

However, in other cases, it can be better to run a redundancy process first as it can strengthen your negotiating position and reduce leverage for the employee.

Employees who feel like they have been fairly treated and communicated with transparently are less likely to want to negotiate hard or take things further, which can make agreeing terms much easier.

4. Anchor the offer commercially

It will generally be the employer who makes the initial offer in a redundancy situation. Take time to consider what level this offer should be at and take into account:

• Any statutory and contractual entitlements
• Risk exposure
• Precedent within the organisation

5. Leave room for negotiation

Avoid overpaying – employees and their legal advisers will often want to negotiate, so build in a buffer.

Start negotiations below your maximum budget. This allows the employee to feel that they have “won” by achieving movement on the initial offer, while you ensure you do not exceed your ceiling.

6. Consider messaging

Factor into negotiations how the exit will be described, both internally and where appropriate, externally. Build in wording making clear that the employee cannot deviate from this.

This ensures certainty on both sides and reduces any risk.

7. Use non-financial concessions strategically

Linked to the point on messaging above, these concessions can often unlock agreement, without impacting on your budget. Consider holding some of these back to offer if terms cannot be agreed initially and to help justify non-movement on the financial amount, where appropriate:

• Agreed announcement wording
• Agreed reference wording
• How notice will be treated – garden leave or payment in lieu
• Flexibility on termination date
• Outplacement support
• Continuation of some benefits, like private medical insurance
• Business protection – can restrictive covenants be waived or limited in scope?

These are high value to employees and low cost to employers.

8. Consider business protection

Settlement agreements are a chance to strengthen post-termination protections. Make sure the agreement includes:

• Confidentiality clauses
• Non-derogatory comment protections
• Reinforced restrictive covenants, subject to negotiation points above

9. Be mindful of tax implications

• Make sure the agreement clearly defines which payments are tax free and which will be made subject to deductions
• Consider post-employment notice pay
• Avoid any misclassifications, which can create a tax risk
• Include a tax indemnity

10. Manage the tone

• Keep discussions professional and non-confrontational
• Avoid overly “hard-ball” tactics, unless the risk is minimal
• Frame the offer as mutually beneficial and make clear what is in it for the employee
• A cooperative tone increases the chance of a quick, clean resolution

For Employees

For individuals, the aim is normally to understand your rights and options and feel like you are getting a fair deal in exchange for entering into settlement terms.

1. Seek independent legal advice early

As for employers, this is our first tip, with our recommendation being to involve a legal adviser early on in the process.

Fundamentally, from an employee’s perspective, it is a requirement of a settlement agreement that they have been provided with independent legal advice on the terms and effect of the agreement. It is simply not valid or binding if this advice has not been given.

When mixed up in tense negotiations, especially where the proposal for redundancy has come as a surprise, it can be very difficult to see the wood for the trees, and to know when there is a genuinely good offer on the table. Hard feelings can muddy the waters and sometimes it takes an outside perspective to offer insight and move negotiations forward.

A good adviser can often improve the settlement terms and given an experienced view on where concessions are likely to be made and whether the offer on the table is reasonable. For many individuals in this situation, it is not something that they have had experience dealing with, whereas a solicitor should be well versed in what a good deal looks like and best practice for negotiating a better deal.

It is worth keeping in mind that as legal advice is a requirement, settlement agreements very often include an employer contribution for the employee obtaining this advice. With costs rising for everyone, including average rates for solicitors, we recommend that you ask about the level of this legal fee contribution at an early stage and ensure that it will be sufficient to cover you obtaining the necessary advice. Be up front about this with solicitors you are looking to engage and ask for confirmation on their fee structure.

2. Don’t feel pressured to rush

ACAS guidance suggests that employees should be given 10 days to consider settlement terms and obtain the necessary advice. Use it to find a legal adviser that feels like a good fit for you, review the terms carefully and obtain the necessary advice.

Where unreasonably short timeframes are given or undue pressure is placed on you to accept terms, it can put the employer at risk. If you are concerned, prioritise getting early initial advice on how to manage this.

3. Get into the negotiation mindset

• Get everything in writing. Generally, if it is not incorporated into the agreement, the employer does not need to honour it
• Be professional, not emotional
• Try not to take things personally – companies will often frame a narrative to justify the offer they are making
• Prioritise what matters most to you (money, reputation, flexibility etc.)
• Expect some back and forth – initial offers are rarely final

4. Prepare well for the negotiations and obtaining legal advice

You should enter any meeting about a settlement agreement well prepared, knowing your available options. We always encourage clients to think early about what their top and bottom line is. That can be difficult if you have never been in this situation before.

It can be tempting to think about cases you’ve heard about where people received huge pay-outs from employers. However, it is important to be aware of your specific circumstances. Think about how long you’ve been with the employer, what your role was, how long it might take you to get another job, and most importantly, try to be realistic. You will only end up disappointed if you go into a discussion with a completely unrealistic goal. One of the benefits of talking to a solicitor early, is that we can help to guide you on what is actually realistic in your circumstances.

Make sure you are clear on the terms, what you are going to receive, when payments are due, and the next steps when speaking to a legal adviser. If something is not clear or you have questions that have not been answered, say that. Their job is to support you.

5. Understand Your Legal Rights

Know your baseline as an employee – what are your statutory and contractual entitlements and what is being offered over and above that? This avoids a situation where you unknowingly accept your offer which simply reflects the bare minimum.

Where a consultation process has been initiated or proposed, understand what that should look like so you can assess whether your employer has done what they need to. There are legal protections to make sure that any process is fair.

It is very difficult to engage meaningfully in any settlement negotiations if you do not have a realistic understanding of the relevant rights and responsibilities. As above, seeking legal advice early, your solicitor will assist with this, and can save you time and the risk of misunderstandings.

6. Negotiate the package, not just the cash

Do not focus only on the lump sum, especially if the employer has made clear that is not negotiable. Consider other concessions that may be more palatable to the employer (or not require approval at a senior level) and valuable to you:

• Bonus payments
• Commission
• Pension contributions
• The continuation of benefits
• Outplacement support
• Waiver of restrictive covenants
• Treatment of notice period
• Retention of company equipment

These can significantly increase the overall value of the deal for you.

7. Review restrictive covenants

Linked to the above, in certain roles and sectors, post-termination restrictions can materially impact on how good a deal can feel. If you have long restrictions, you may feel that you need to secure a higher lump sum to compensate for the difficulty you may have in securing another role in the near future.

Restrictions can be tricky to enforce in the UK and they can therefore sometimes be an area a business is prepared to move on, rather than offer a higher lump sum payout, especially in a redundancy scenario. Consider asking for waivers of some or all aspects of restrictions as part of negotiations or look at a reduced duration.

If there is no movement on restrictions, conversely this can help rationalise any request for a higher lump sum.

8. Consider your leverage

Understand the strength of your position to inform negotiations. You may have more leverage if:

• There is a material risk of an unfair dismissal claim
• The process has been carried out and not handled correctly
• You have raised grievances or concerns around unfair treatment
• The company has a real business need to finalise and implement the new structure quickly
• The company has a preference for retaining a specific individual or individuals in roles that you would be a suitable candidate for

The stronger your legal and commercial leverage, the better your negotiating position.

9. Control the messaging

Protect your reputation. Agree internal and external messaging as well as a reference and ensure wording used is neutral, or positive.

Ensure confidentiality and non-derogatory comments clauses are mutual.

This matters for future job searches and being able to control the narrative.

10. Be Mindful of Tax Implications

Redundancy payments will likely have tax implications. Seeking advice from a tax professional can help parties understand the financial implications of the settlement agreement. Whilst an employment solicitor cannot advise you on specific tax implications, they can assist in drawing your attention to where you may be taxed and help to explain what the legal jargon in settlement agreements means, such as post-employment notice pay, pay in lieu of notice, and indemnity clauses.

We hope these tips prove helpful if you find yourself in this challenging situation. If you need any support along the way, please don’t hesitate to get in touch with our redundancy solicitors; whether you’re an employer or an employee, we’re here to help make the process as straightforward and stress-free as possible.

For more detailed insights on redundancy and settlement agreements, take a look at our guide and tune in to our podcast.