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Settlement Agreement and the Impact of Notice Payments whilst on Furlough Leave

Furlough leave

Tuesday, April 28, 2020

Settlement Agreements (formerly known as Compromise Agreements) are the only means by which to compromise potential Employment Tribunal claims where proceedings have not been issued.

Settlement Agreements are creatures of statute and the Employment Rights Act 1996 (ERA 1996) states that in order for a Settlement Agreement to be enforceable there must be a written agreement, which refers to the claim, identifies the parties and the employee must take independent legal advice on the agreement from someone who holds a policy of insurance to give such advice (e.g. a solicitor).

Settlement Agreements can also include things like employment references, internal announcements, confidentiality clauses (both during notice and post-termination), calculation of a redundancy payment and any additional money that may be paid to the employee including payment of holiday pay, notice pay and bonuses. The Agreement will identify the termination date and the date for payment of the agreed settlement monies. The Employee must seek independent legal advice on the Settlement Agreement and the legal adviser has to sign a certificate which is attached to the Agreement.

In this COVID 19 days, a question likely to be on the employer’s lips is whether or not employees can be made redundant whilst on furlough and if so, what happens to the calculation of notice and notice pay?

So, can an employer make an employee redundant whilst on furlough leave? In short, yes it is entirely possible to make someone redundant whilst they are on furlough leave.

Can the employer serve notice on an employee who is on furlough leave? Again, yes but a word of caution, an employer who does so would be wise not to invoke any payment in lieu of notice clause. Such a clause has the effect of ending the employee’s employment early and if the employee is no longer on the payroll at the date the employer makes his submission on the HMRC portal for reimbursement of furlough pay; the employer will not be able to recoup 80% of salary for that period. If however the employee is furloughed during the notice period; the employer will be able to claim reimbursement through the portal in the usual way.

Finally, at what rate is notice pay payable? Normal pay or furlough pay? There is an argument to say that the employee should only be paid at the rate they were being paid at the point that notice was served; therefore if the employee was only receiving 80% of salary at the time they were served notice; their notice pay should only be paid at 80%. However the better of school of thought, and one which a Tribunal is likely to adopt, is that notice pay should be paid at 100% in the same way that holiday pay during furlough can be recouped under the Coronavirus Job Retention Scheme up to 80% and the remaining 20% is to be topped up by the employer. This is backed up by sections 221 & 222 of the ERA 1996 which states that an employee’s weekly pay is to be calculated by reference to “normal working hours”. Where an employee is on furlough leave and is not working at all (a situation synonymous with garden leave) their pay during period notice will be calculated with reference to the employee’s normal working hours prior to going on furlough leave.

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