In this comprehensive guide to Settlement Agreements, I’m going to try to address every single aspect of them. Of course, you still need independent legal advice on your settlement agreement, but this page will hopefully answer any questions you may have.
I’m going to look at the following:
- What is a Settlement Agreement
- What circumstances are Settlement Agreements used?
- What is a Protected Conversation?
- What is the right level of compensation for your termination payment? Negotiation of the termination package.
- What do the terms of the settlement agreement actually mean? Negotiation of the terms.
- What is the tax position of settlement agreements?
What is a Settlement Agreement?
A Settlement Agreement is a legally binding contract between an employer and employee under which it is usual (but not essential) for the employment to come to an end. The nub of such agreements are that the employee agrees not to sue the employer for anything, also known as waiving any employment claims, usually in return for some money.
It is a legal document, a contract, and one which the law actually requires an employee to seek independent legal advice.
In July 2013, the Enterprise and Regulatory Reform Act was introduced and the name of the agreements changed from compromise agreement to settlement agreement, on the basis that the language used more accurately reflected what the agreements were – they were a settlement of claims rather than a compromise of claims.
Statutory Requirements for a Settlement Agreement
For a settlement agreement to be valid, certain conditions (which are set out in section 203(3) of ERA 1996, with corresponding provisions in other statutes) must be met:
- The agreement must be in writing.
- The agreement must relate to a “particular complaint” or “particular proceedings”
- The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal.
- The independent adviser must have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.
- The agreement must identify the adviser.
- The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions have been satisfied.
If an agreement fails to comply with any of the requirements, it will be invalid.
Requirement to settle a particular complaint
Your settlement agreement must to a “particular complaint” or “particular proceedings”. For most people, they will relate to a particular complaint – although do note that this does not mean that you have already raised the complaint itself.
A “complaint” in law effectively means the potential claim that might be brought, as looked at below, but unfair dismissal , discrimination, equal pay etc.
We’ll always look at what claims you might have when explaining the settlement agreement to you.
What does Independent Legal Advice mean?
For a settlement agreement to be effective, the employee must have received independent legal advice on the effect of the agreement. There is no equivalent requirement that the employer has obtained legal advice.The employee’s adviser must:
- Be named in the agreement.
- Have a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of the advice.
An agreement will be invalid if the employee does not actually receive independent legal advice, despite the signed agreement and adviser’s certificate stating otherwise.
Who can be a relevant independent adviser?
There are broadly four categories of “relevant independent adviser”:
- Qualified lawyers. In England and Wales this means anyone authorised to exercise a right of audience or to conduct litigation. This includes practising solicitors and barristers, legal executives authorised by CILEx to conduct litigation or advocacy,
- Trade union advisers. Officers, officials, employees or members of an independent trade union who have been certified by the union as competent to give advice and as authorised to do so on its behalf.
- Voluntary sector advisers. Those working at an advice centre (whether as an employee or a volunteer) who have been certified as competent to give advice and as authorised to do so on its behalf, provided the employee has not paid for the advice.
- Others. Those specified in any order made by the Secretary of State. This covers a Chartered legal executives employed by an SRA regulated solicitors’ practice.
In 2008 the government consulted on whether to extend the definition of relevant independent adviser to include qualified HR professionals, among others, but decided not to do so. It is for the employer to satisfy themselves that the person advising the employee is properly qualified to act as a relevant independent adviser. This is because the risk of the waivers in the agreement not being enforceable falls on the employer. This is why most compromise agreements in practice contain an adviser’s certificate.
Independence of your lawyer
To ensure that the advice given is truly independent, the adviser must not be:
- Your employer
- Employed by your employer
- A lawyer acting for your employer
The terms of the settlement agreement may include an acknowledgment by the employee that they have received independent legal advice. If so, the agreement would be sufficient evidence that this requirement has been satisfied. There is no need for the adviser to be a party to the settlement agreement or to sign any confirmatory letter or certificate, although the latter is common practice.
If is acceptable for your employer to recommend an indepedent lawyer or give a list of, say, three local solicitors. They may have even negotiated better rates with those lawyers – as long as they are SRA Regulated Solicitors, they will be bound by professional rules in respect of independence.
Of course, we at Settlement Agreement Solicitor Leicester meet all the requirements and are able to give you independent advice on settlement agreements.
Extent of legal advice
The independent adviser must advise the employee on the terms and effect of the settlement agreement, in particular its effect on their ability to bring a tribunal claim under the relevant legislation. The requirement for the employee to receive advice on the “terms and effects of the proposed agreement” does not require the relevant independent adviser to advise on whether the deal on offer is a good one or whether they think the employee should accept it.
Tribunal decisions have also said:
- The requirement for a settlement agreement to relate to a “particular complaint” means that the complaints must be identified in the agreement itself, not that they must have been specified or communicated at any earlier stage.
- Generic advice given by panel solicitors in group presentations to employees before individual meetings at which the solicitors were formally instructed could form part of the “advice” given to each employee. This was the case even where the solicitor who gave the presentation came from a different firm to the solicitor who later signed the agreement.
In large collective redundancy exercises it is common for employers to invite a panel of advisers to provide independent legal advice to a group of employees in relation to their settlement agreements. Often, advisers may hold group meetings with employees to provide them with generic advice on the terms and effect of the agreements. However, as each individual employee is the client, it is important that you have an individual meeting with your advisor to address any particular issues you may have in relation to your settlement agreement.
What circumstances are settlement agreements given in?
Actually, settlement agreements can be used in many different circumstances. When we’re advising employers on employment law issues, a settlement agreement often comes recommended as it shortcuts things and is easier and cheaper to put in place.
I’ve dealt with thousands of clients and while their stories are all fascinating and different, they do tend to fall in to one of the following categories.
Stress / Anxiety
I see a lot of clients who have been off work with stress or anxiety. This is usually caused by a new manager, or work colleague, but can be the work itself. It can also be caused by something external, not at work.
Many clients will be on medication to help them through the stress anxiety depression etc that comes with such mental health at work issues.
A settlement agreement in these circumstances is really beneficial, particularly if work is the cause. It allows you to draw a line in the sand, a clean break, and start to start to feel better.
Disability / Long Term Health / Capability
Settlement Agreements are frequently offered where employees just are not able to do their job anymore, either due to disability, long term health issues, old age or just capability.
Often, these may be presented before during or after a “capability review” procedure.
It is important that we consider claims relating to disability discrimination here. If you cannot do your job, your employer is legally able to dismiss you, but needs to ensure it is not discriminating and needs to consider suitable alternatives to keep you working if possible.
If it’s not possible to keep you, then a settlement agreement is a nice way to “thank” you for the work you have done – similar to voluntary redundancy – it can be used to give you a termination package/settlement payment which you might not, in law, be entitled to but often is a generous payment if you’re genuinely not able to work any more.
Of course, if the disability or health issue was caused by your employer, then we would need to consider whether the level of compensation was correct.
Settlement Agreements are often offered to employees as a shortcut to a performance management review, performance plans and management reviews.
A familiar situation is the employer saying something like “neither of us want to go down that route, and so we’re prepared to offer you a settlement agreement”.
Performance Reviews are tools invented by HR and Legal Professionals as a way to get rid of people from organisations. Used properly, they allow objective criteria to be agreed on and consequences flow if those criteria are not met; and if they are met then we’re all happy. Unfortunately, experience shows that performance reviews are not used genuinely and are often used by bad managers as a way to get rid of a certain individual. You’ll often find that the criteria used are not objectively reasonable (e.g hit sales of £500,000 when you’ve only ever done £200,000).
Thus, when faced with a performance review, unfortunately the prospects are never usually great and will usually result in a dismissal. That dismissal is likely to be “unfair” but if you’re being offered a settlement agreement then the employer will realise the risk and that’s why there is an offer on the table.
Redundancy / Voluntary Redundancy
Settlement Agreements are often used in the redundancy process, particularly with voluntary redundancies. Less so with genuine redundancy situations, but they can be used to shortcut the full process. Often I find them being used in sham redundancy situations, that is where an individual has been targeted for exit from a company (for whatever reason) and the employer decides they will try to say that your role is redundant – however far from the truth that might be.
Redundancy has a proper meaning in law.
The circumstances which meet the statutory definition of redundancy are set out in section 139(1) of Employment Rights Act 1996. To summarise, the statutory definition of redundancy identifies three sets of circumstances:
- Business closure (closure of the business altogether).
- Workplace closure (closure of one of several sites, or relocation to a new site).
- Diminished requirements of the business for employees to do work of a particular kind.
If you fall into one of these categories, then it is likely to be a genuine redundancy situation. Settlement Agreements are used in redundancy situations usually when the company is paying additional sums, known as ex-gratia sums or compensation payments.
Voluntary Redundancy is where you as employee opt to be made redundant to avoid the full process taking place. There is usually a benefit to voluntary redundancy, such as enhanced redundancy pay or some other enhanced terms.
Ironically, settlement agreements are offered to employees who are subject to disciplinary proceedings or misconduct. It is sometimes the case where the employer “has no option” but to dismiss, but the employee has usually a good long clean track-record.
Settlement Agreements can be used therefore to dismiss, perhaps with some notice being paid rather than “gross misconduct” and immediate termination. There is usually no additional compensation paid. There can sometimes be a reference agreed, even if it is only a factual reference, and the Company’s position will tend to be that it is a better alternative that the gross misconduct dismissal and and the blemish on an otherwise healthy employment record.
Many employees would choose to take a settlement agreement and not have the gross misconduct mark against their name.
Settlement Agreements can be offered in other disciplinary circumstances, even if the allegation is unfounded and without merit. Sometimes, discipline is used as a stick to remove specific employees and there may be trumped-up charges against you which, if acted on by the employer, would likely result in an unfair dismissal claim. Instead, Employers may offer a settlement agreement to avoid the need to deal with the disciplinary process and ensure that no tribunal claims will follow.
Negotiations on Settlement Agreements – The Process
Negotiating settlement agreements
When negotiating a settlement agreement it is usual to specify that all communications should be treated as “without prejudice” and “subject to contract”. This is to ensure that:
- The parties can speak freely in negotiations without fear of anything said being used in evidence against them should the negotiations break down.
- Neither party is legally bound by anything “agreed” in the negotiations until a final written agreement is actually signed.
An employer may want to propose a termination of employment on agreed terms before there is any legal dispute with the employee, for some of the reasons set out above. Rather than go through capability, redundancy or disciplinary proceedings, with the risk of subsequent litigation and in some cases negative publicity, it is often seen as commercially beneficial to start confidential exit negotiations with a view to a financial settlement.
An employer will usually therefore look to have a protected conversation with an employee.
What is a Protected Conversation?
A protected conversation, or an off-the-record chat, is a discussion between employer and employee about pre-termination negotiations that is inadmissible in any legal proceedings or complaint. Interestingly (or not!!) they are actually called pre-termination discussions in the UK and protected conversations eminent from other jurisdictions.
It allows an employer to be frank with an employee and say that they want them gone without admitting liability or without fear of retribution in the employment tribunal.
There is no requirement for there to be a current dispute or issue between the parties for a protected conversation to happen. It can be out of the blue (or at least to the employee).
It means that an employee will not normally be able to rely on the fact that their employer has offered a settlement agreement as evidence to support a claim for say constructive unfair dismissal – although note it does not extend to all claims.
Our experience is that bad employers use protected conversations to cover up unlawful, or less than ideal, conduct. Few people properly know what protected conversations are. By their nature, protected conversations frequently come out of the blue. Many clients are confused by them and do not understand their legal position or their rights.
The ACAS Code of Practice On Settlement Agreements details some helpful points on protected conversations and is a must read for any employer considering a protected conversation or an employee being invited to one or having just had one!
Prior to s111A Protected Conversations, where an employer has taken legal advice, such discussions tended to involve a carefully scripted conversation, during which the employer tries to avoid any suggestion that dismissal is inevitable if the parties fail to agree on a settlement package. This can present employers with an uncomfortable situation.
Negotiation: common scenarios
Typically, the process of negotiation can take place in one of four scenarios.
Where employment has ended
The employee may be presented with a draft settlement agreement (marked “without prejudice and subject to contract”) and asked to come back to the employer within a fairly short timescale with a response to the settlement offer. Less often, as it is a draconian step, employers sometimes dismiss employees with immediate effect (or with a payment in lieu of notice), at the same time as handing them a draft settlement agreement with a deadline within which to respond. The rules on pre-termination negotiations do not apply as termination has already taken place.
This is common in certain industries (such as financial services) where the risks of keeping a discontented or potentially disreputable employee in employment while negotiations are conducted are seen as too great. In such situations, the employer will usually have decided that the litigation risks (of claims for unfair dismissal and wrongful dismissal, for example) are smaller than the other commercial risks. The employer will usually have factored in the enhanced bargaining position this may give the employee during the negotiations.
Where employment and active duties continue
This is by far the most common circumstance.
The employee is approached by their manager or human resources department (either in a without prejudice discussion or a pre-termination negotiation). They are made an offer and given a draft settlement agreement (headed “without prejudice and subject to contract”). They are told to take it away and consider its contents, usually within a fairly short timescale. Although the Acas guidance on pre-termination discussions suggests ten days for consideration of the offer, the timescale offered may be shorter, particularly where the discussions are genuinely “without prejudice” (possibly five days).
The employee will remain in the workplace, actively carrying out their duties, but will be asked to keep the settlement discussions confidential, including the existence of the settlement agreement.
On the whole, this approach is likely to be used where the situation between the parties is not too acrimonious, trust and confidence has not broken down and there is no risk to either party in the employee continuing to work (for example, no risk of confidential information being stolen or risk of relationship with clients and colleagues deteriorating). It might be used, for example, where there is a likely redundancy situation or where there are ongoing performance issues the employer has no appetite to deal with them formally.
Where employment continues but the employee is not actively carrying out duties
A variant of the above is where the employee is still employed but not actively carrying out their duties. They may be on long-term sick leave or family-related leave. As above, the employee will be given a draft settlement agreement (marked “without prejudice and subject to contract”) and asked to respond within a certain timescale. A longer timescale may be given than the other scenario because the situation is likely to be less immediately awkward where the parties are not interacting on a day-to-day basis.
It is not uncommon for an employee who has lodged a grievance to go on long-term sick leave, creating a “no-win” situation for both parties in which the relationship seems to have little prospect of returning to normal. Such a situation may or may not be acrimonious.
Settlement negotiations need to be conducted with care and sensitivity, having regard to the employee’s health and possible disability issues. For example, a meeting off-site or at the employee’s home may be suggested. If an employee on maternity leave is being approached (for example, because her position may be redundant upon her return), the employer needs to be aware of the particular risks in making such an approach.
Where employment continues but employee is sent home
The employee may be given the draft settlement agreement, or an outline of settlement terms, and asked to remain at home while they consider the offer over a certain timescale. They may be placed on garden leave, or else just told it is better for them to remain at home while they consider the position. They will be asked not to have contact with colleagues or clients and their computer access may be disabled.
Where employment has not been terminated, the employer is creating a de facto hostile situation in which it would be hard for the employee to envisage returning to active duties. This practice, while it may carry the risk of breaching trust and confidence, is in fact very common.
Possible steps in a settlement discussion (employee still employed)
Step 1: invitation to meeting
The employer invites the employee to a meeting at a mutually convenient time and place. The correct approach will depend on the circumstances, but in most cases the employer will not wish to notify the employee in advance that the purpose of the meeting is to discuss settlement. If the employer considers it necessary to give a reason for the meeting, or if the employee is pressing for further information, it may be appropriate to refer to the underlying issue which has led the employer to make the offer and indicate that it is an informal discussion of that issue.
Step 2: at the meeting
At the meeting, the employer explains its concerns (for example, performance issues or the breakdown of the working relationship) in a neutral manner, and proposes an exit with an agreed settlement package. The employer should provide enough information for the employee to understand what has led to the offer and the potential consequences if they do not depart. A lack of information about the background may leave the employee unaware of the risks of remaining in employment and therefore reduce the incentive to accept the offer.
Where inadequate information is provided, this could support an argument that there is a discriminatory basis for the offer. However, the employer should also be cautious about providing excessive or detailed information about the underlying issue. Doing so could suggest that the employer has pre-determined the employee’s dismissal and amount to improper behaviour. It may also lead the employee to focus on defending against the accusations rather than considering the settlement offer. Although the employer should ensure that the employee is aware of the possibility of disciplinary or capability proceedings if they choose not to accept the offer, they should not be put under pressure to do so and the employer should not normally give a view on the outcome of any such proceedings (although it could make reference to the possible outcomes). The employer should also explain that if the employee is ultimately dismissed then they will not be entitled to leave on the same terms as are currently on offer.
It is good practice for the employer to highlight that settlement discussions are expected to be inadmissible in tribunal proceedings and that they will have no bearing on any subsequent performance management or disciplinary procedures if settlement discussions are ultimately unsuccessful. In the light of the risk of admissibility of the discussion, some employers provide the manager conducting the meeting with a script or skeleton template for the meeting.
Step 3: written offer
If the employee agrees to explore the suggestion of settlement, the employer produces a written offer. It will normally be helpful to also provide a draft settlement agreement at this stage so that the employee can take legal advice on the whole package. This will also potentially allow matters to be resolved more quickly, given that the Acas Code of Practice on Settlement Agreements suggests that an employee should, as a general rule, be allowed ten calendar days to consider the proposed settlement agreement. If there is delay in producing the settlement agreement then this extends the timescale for completion.
I have seen a number of employers seek “agreement” on the basic terms of the agreement before an actual settlement agreement is drafted. My advice to employees is always to request a full draft of the settlement agreement to review with your solicitor before you could indicate yes or no.
Step 4: settlement agreement
If the employee is interested in proceeding with the settlement, the employer can provide the employee with a settlement agreement documenting the terms, if they have not already done so. The employee will need to take independent legal advice on the implication of entering into the agreement.
If the employee is not interested in exploring settlement, the employer should cease settlement negotiations and seek to tackle the underlying problem.
Contents of a Settlement Agreement
So you’ve now got a draft Settlement Agreement in your hands. You know you need to take advice on it, but what does it all mean?! When we meet to review the agreement, I will go through each paragraph and explain it so that you understand fully the terms and effect of the agreement.
What does ‘Without Prejudice’ and ‘Subject to Contract’ mean?
At the top of most settlement agreements are the words “without prejudice” and “subject to contract”, but what do these actually mean?
The Without Prejudice rule generally prevents statements made in an attempt to settle a dispute from being used as evidence as some kind of admission of liability in Court or Tribunal.
It needs to be an attempt to settle a dispute, and needs to be a genuine attempt to resolve the dispute, for it to get protection (and not be admissible in Court).
Generally, people involved in settlement agreements head every letter or email with the words without prejudice just to be really clear.
The words Subject to Contract meanwhile mean that the terms offered or set out in the letter/email/settlement agreement are not binding until and only when the agreement has been signed by both parties. The offer made is conditional upon the contract bein signed.
Can you negotiate the terms of a Settlement Agreement?
Yes, absolutely! We are often instructed to seek more money for clients, to get a better deal, but also to negotiate the terms – the actual words used – in the agreements.
Settlement Agreements are usually drafted by the Employer, but it does not mean that they cannot be challenged or amended. Negotiations tend to focus on only a few key clauses which may become a sticking point, with the employee asking for certain clauses to be removed or modified. The extent to which there will be protracted or involved negotiations will depend on factors such as:
- The seniority and pay of the employee, together with the level and intricacy of the package on offer.
- The validity and complexity of any claims.
- Whether the employee is departing on acrimonious or more neutral terms.
What are the terms of a Settlement Agreement?
While your settlement agreement solicitor will take through the terms of the settlement agreement when you meet, so that you fully understand the terms and effect of the agreement, the following gives you a guide on what are common clauses in a settlement agreement.
The termination date is the last day of employment with the company.
It is not uncommon for the employee to ask for the termination date to be slightly later than that proposed in the initial draft of the settlement agreement. This may be to give you some extra time to look for alternative work, or just to provide you with a few days’ extra salary.
If the termination date is close to the end of the tax year, it may be more tax-efficient to move the termination date into the next tax year. The payments being made under this clause will then be treated as taxable in that year, which will mean that the employee has longer to pay any additional tax due and may be able to make use of lower rate tax bands that would otherwise have not been used.
Other considerations may affect the proposed termination date, for example the fact that share options will vest on a certain date or that entitlement to a bonus will soon accrue.
Occasionally, the termination date can be the length of the notice period – say 3 or 6 months. In these circumstances, employees are often asked to sign what is known as a re-affirmation certificate
Payment of salary until the termination date
This will usually be for the last month’s salary – or last few days if your termination date is mid-month.
You should be aware that this payment of salary will be taxed in the usual way.
Payment of any outstanding expenses or loans
If you owe your employer anything, then it will usually be deducted from your final pay. This could be something like a loan, or training repayment costs.
Payment in lieu of any accrued but unused holiday entitlement (or repayment of any holiday taken in excess of entitlement)
If you have accrued but unused holiday, then you should be paid a sum in lieu of this. For many employees, this should be 28 days per year but could be more. You then take away the number of holidays you have taken, leaving you with the days remaining (for the whole year) and this needs to be pro-rated for the period between the start of the holiday year to your termination date (or end of notice period).
Payment in lieu of notice (PILON)
A payment in lieu of notice is paid where your employer does not wish you to work the notice period, and is quite common in settlement agreements.
Your notice period will either be:
- the notice period in your contract (eg 4 weeks, 1 month, 3 months, 6 months), or;
- statutory notice of 1 week for each year worked up to a maximum of 12 weeks’ notice.
It is important to realise that any payment in lieu of notice/PILON will be taxed at your usual rate of PAYE tax.
Compensation for loss of employment
These can be referred to in agreements as:- compensation payment, termination payment, settlement payment, ex gratia payment.
This is the sum of money, usually paid tax free up to £30,000, which is paid to you as compensation for loss of employment.
Continuation of specified benefits after termination, including any conditions to which the compensation or continuation of benefits are subject
In most cases, contractual benefits will cease at the termination date.
Occasionally, some benefits may be extended post-termination, for instance:
- Use of Private Medical Insurance
- Use of a Car
- Share schemes etc
Usually, pension contributions will stop on the termination date. The agreement will confirm this and often state that the employer will notify the pension scheme that you are no longer employed.
Your options generally are to keep paying into the pension, keep the pension with no contributions or transfer your pension. We recommend you take advice from an independent financial advisor on what’s best for you.
Purchase of company property, such as company car
If you are going to be buying your company car or laptop from your employer, there should be a clause in the agreement to deal with it.
Payment of outplacement fees
Many employers (and indeed employees) realise the benefit of outplacement support. It is not just about help with a CV, but can be coaching and training for interviews, assessing career changes and much more.
Contribution to legal fees
Most settlement agreements will include an obligation on the employer to contribute a sum towards the legal fees.
Many settlement agreement solicitors charge a fixed fee for settlement agreements, although a number will charge more than the contribution. This is typically £500 plus VAT but can be more depending on the circumstances. For more complicated, drawn out negotiations, it could be more like £1500-2000 plus VAT.
However, at Settlement Agreement Solicitor Leicester, we limit our legal fees to the contribution of the employer – subject to a minimum contribution of £250 plus VAT – if the agreement is signed when we meet.
Waiver of claims by the employee, including warranty that the claims listed are the only claims which the employee has against the employer
This is the main part of the agreement and it will say that the agreement is in full and final settlement of all and any claims and usually also list claims in the agreement.
Full and final settlement means that once signed, you cannot change your mind. You are agreeing to waive any claims you may have and agreeing not to issue any tribunal or court claims against the employer.
All and any claims means that while it covers some specific claims you might have, such as unfair dismissal, it also covers anything else that might have happened whether you realise it is a claim or not.
In short, this clause means you cannot sue the employer for anything.
There’s only three types of claims that you can usually still bring even if the settlement agreement is signed, namely:
- Claims for pension entitlements
- Personal Injury claims you are not aware of and which have not developed
- claims to enforce the agreement itself (e.g if they do not pay).
Withdrawal of any tribunal proceedings
If you’re being given a settlement agreement because you’ve already issued a tribunal claim, then the agreement will oblige you to withdraw those proceedings.
Return of the employer’s property
On or before the termination date, you will be obliged to return to the employer any company property. This can include things like uniform, laptop, mobile phone, keys, passes, and also documents and confidential information.
Warranties from the employee that the employee does not have an existing job offer and that they have not committed a repudiatory breach of contract.
There is usually a warranty (which is a statement by you that it is true) that you have not been offered or accepted a job offer. This may seem strange, but the law states that if you do have a job lined up, then you have not suffered any losses and therefore they would only need to pay you your contractual payments and not the compensation payment.
Agreements usually include a confirmation from you that you have not done something (which the employer doesn’t know about) which would amount to gross misconduct. This is because if you had done something wrong, then they would sack you without payment.
Sale or transfer of any shares held by the employee in the employer
If you held shares in the company (not a PLC) then you will usually have to transfer these back to the company. The value attached to the shares will depend on how they were given, what the company articles say and whether there was a shareholders’ agreement.
In some 90% of cases, the agreed reference these days is simply a factual reference which sets outs your start and end date and job role, and not much more. Don’t be upset or put off by a standard factual reference, as they are very commonplace. Employers do not want to risk getting sued for anything they say.
Occasionally, an Employer will allow a more bespoke reference to be agreed. I always ask you as an Employee to write your own reference, as I find they are generally reasonably written, not too over the top of how amazing an employee you were, and therefore tend to be accepted. It is also better than asking HR to write a reference as they will never appreciate you or understand what you did and your impact.
Resignation from all directorships, offices, trusteeships or other appointments held because of employment by the employer
If you were a director or trustee, then you’ll be required to resign those roles (usually without any additional compensation).
Garden leave until termination
More often than not, the date of termination is quite soon after (or sometimes before!). However, where there is a gap between the signing of the agreement and the termination date, it is usual for there to be a period of “garden leave”.
Garden leave is where you are required to stay at home, not do any work, not contact anyone for work related reasons, and just get paid.
It could be that working Garden Leave is a way to make you work your notice period without actually working – rather than paying you in a lump sum as a PILON payment.
In contracts of employment for senior roles, or for people involved in sales or customer/client facing roles, there will often be restrictive covenants. A restrictive covenant is an agreement that you will not do certain things after termination of your contract and usually include:
- non-compete – you cannot work for a competitor for a period of time
- non-solicitation – you cannot approach existing clients to persuade them to use you/your new employer for a period of time
- non-dealing – you cannot work with specific customers for a period of time
- non-poaching – you cannot try to take staff away from your previous employer to your new one.
Restrictive covenants are a complex area of law, and I could write another book just on them, so call me if you need help.
In terms of them in settlement agreements, you find that they are simply a restatement of existing restrictive covenants but occasionally can be a modification of them too.
Confidentiality of the employer’s information
You are obliged in law and probably in an employment contract to keep your employers confidential information, confidential. A settlement agreement usually reaffirms the fact that you will keep things confidential information.
There is usually a definition of what is Confidential Information and it will typically include things like customer information, pricing, finances, plans, marketing, suppliers and such like.
Confidentiality of the terms and existence of the termination and the agreement.
You will be required to keep the terms and existence of the settlement agreement confidential. That means, you cannot talk about it to any third party or tell anyone the details about the termination or the package itself.
You can still tell your spouse, immediate family, advisor and sometimes people like counsellors, insurers and government agencies.
Agreement on announcement or press releases
For higher profile exits, there can be an agreed external announcement or press release.
Many settlement agreements do not require these, but some will still have an agreed announcement to staff or your team, which can be helpful given you’re not supposed to have discussed your exit with anyone. These are often that you are “seeking new challenges” but can be whatever you want them to say (within reason).
No derogatory comments
You will be required to agree not to make any derogatory or disparaging comments about the company or anyone that works there and not do or say anything which would bring the company into disrepute.
An entire agreement clause
An entire agreement clause in a settlement agreement seeks to exclude any other document, email, discussion from being binding – only what is written in the agreement itself is binding. So for example, if the company has said if you sign they will pay you last year’s bonus, but the agreement does not include that in writing, then if they do not pay you will not be able to sue them for it.
A governing law and jurisdiction clause
Almost always this will refer to the Courts and Laws of England applying, although for some internationally based organisations, it may differ.
Without prejudice and subject to contract clause
As mentioned above, without prejudice and subject to contract, means that the discussions around the settlement agreement, and the agreement itself, are not able to be used as evidence of an admission of liablity and the offer contained within it is not binding until both parties sign and a contract is formed.
In some settlement agreements, where there is a considerable gap between signing the agreement and the actual termination date, a company may require you to sign a re-affirmation certificate under a settlement agreement solicitors advice again.
This is a simple task and is just to ensure that no new claims have arisen between signing and exiting the company.
They are usually used where the notice period is being worked for the purposes of a handover or similar.
A list of all claims being compromised- Schedule
In many versions of settlement agreement templates, there is a list of all possible claims that are being compromised.
Your legal advisor should advise whether you have any specific claims. However the agreements are always “in full and final settlement of all and any claims” and so there is a list of many types of employment related claims that employees might be able to bring.
A certificate by the employee’s adviser that they meet the definition of relevant independent adviser and that they have given the advice
As mentioned above, your settlement agreement solicitor will be required to sign the agreement or a certificate/letter to confirm that they are an independent advisor according to legislation, that they are insured to give the advice and that they are independent and not acting for the company.
Most agreements have this as a schedule at the back, but some companies require it to be on the law firm letterhead.
Tax and Settlement Agreements
In this final section, we look at the tax aspects of settlement agreements. What tax will you have to pay on your termination package? Will you have to notify HMRC of the payment? Is it all tax-free?
Getting tax wrong on termination
It is important that you understand the tax position of your settlement agreement properly.
Employers have to notify HMRC where the package is above £30,000, which can often be the case. But even where notification doesn’t happen, of course HMRC can always investigate any matters.
It is important that the termination payment is taxed and subjected to NICs correctly, as HMRC can recover unpaid tax and NICs, penalties and interest from the employer.
Within almost every agreement is a tax indemnity, which says that if the employer has to pay any such excess tax, that you as employer will reimburse the company.
Tax is tax – and its is personal – and so if there is a calculated liability you will have to pay up.
Tax on earning to the date of termination
If there is a gap between signing the agreement and your termination date, you will usually be paid salary for that period.
That will be taxed (PAYE and NI) in the usual way, along with any other deductions such as pension contributions.
Tax on Notice Pay – Post-Employment Notice Pay or PENP
Notice Pay, whether paid as a lump sum or in instalments, is taxable.
In 2018, the law was refined to cover this and legislation introduced a terribly complex formula for working out Post-Employment Notice Pay (or PENP for short).
What happened previously is that employers would pay a single “tax-free” lump sum of, say, £10,000. In reality, that figure would be made up of say £5,000 notice pay and £5,000 compensation. It was rife, and almost everyone was avoiding the tax liability by structuring it all as a “compensation payment”.
To clamp down on this tax avoidance scheme, the PENP legislation was brought in. It means that any sum which would have been paid had you worked a notice period, is taxable, even if it is lumped together and represented as being tax free.
It is important, in our view, to therefore distinguish in the agreement what amount is the actual notice pay and what is not.
In short, you are entitled to a notice period. Whether the company pays it or makes you work through the notice period, it all counts as earnings and is taxable.
£30,000 Tax Free under Settlement Agreements
There is a provision in legislation which permits payments of up to £30,000 to be paid tax-free providing that they are wholly related to, and purely, compensatory.
That means that you cannot sneak in salary, commission, bonus, share sale money and the like into it and claim it is compensation. It needs to be genuinely compensatory.
Statutory redundancy pay is automatically included into the £30,000 tax free aspect.
If your compensation figure exceeds the £30,000 then PAYE tax and NI will be deducted at source at your usual tax rate on the excess.
Minimizing the effect of tax on settlement agreements
If you are a higher rate tax payer, it is likely that your overall package will be in excess of the £30,000 tax free limit.
We often see employees (on advice from independent financial advisors) putting sums of money into a pension to claim tax relief back on sums paid.
In more complicated matters, such on a share sale, where the employee is also a shareholder, tax advice may be required in order to structure the deal tax efficiently.
Your settlement agreement lawyer is unlikely to be able to give such tax and investment advice, and so it is strongly recommended that you do take independent financial and/or tax advice if you’re unsure on any aspect of tax.
Conclusion & Next Steps
Thanks for reading this guide on Settlement Agreements. If you got this far and read it all, then well done you. You are now more knowledgeable than most other lawyers who advise on settlement agreements but are not settlement agreement specialists like us.
If you have been given a settlement agreement, or you are in discussions about one, or just have some questions (however odd you think they might be!) then get in touch.
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