Entering into a settlement agreement for the first time can be somewhat daunting but the good news is that these agreements are relatively standard in form and, in most cases, your employer/former employer will usually cover the costs of an independent legal adviser (usually a qualified lawyer or trade union official) taking you through the agreement so that you properly understand your rights and obligations.

Here’s an overview of the key terms that will give you a good idea of what to expect in the agreement (1).

Notice

The agreement will typically set out whether you are required to work out your notice, whether you will be placed on garden leave for any period (meaning you will stay at home and be subject to certain obligations, for example not to contact customers/colleagues) or if you will be paid out in lieu of your notice entitlements. You should double check that your notice period is correct by reference to your contract of employment or where you do not have a contractual notice provision, your adviser will be able to confirm your statutory notice period by reference to your length of service.

Payment clause

This clause will set out the different payments which will be made to you, the timing of those payments and how they will be taxed. As well as any contractual payments to be made (for example for accrued but untaken holiday), generally the agreement will provide for compensation (a ‘termination payment’) in return for you waiving your potential claims.

Tax Indemnity

Generally the first £30,000 of any termination payment can be paid free of tax on the basis that this represents compensation for your loss of employment rather than income. The quid pro quo of the payment being made without deductions for income tax or national insurance contributions, however, is that you will be required to give a tax indemnity under the settlement agreement.

The tax indemnity sets out that in the event that HM Revenue and Customs deem that insufficient tax has been paid and seek to recover this from your former employer, you will immediately reimburse the employer for this amount. Some amendments that your adviser may suggest to the drafting of the indemnity include an obligation that your employer will give you prompt notification of any demand from HMRC and will allow you access to such information as you may require to challenge such a demand. Wording can also be included to reduce the scope of the indemnity so as not to apply to any penalties or interest that is incurred as a direct result of delay on the part of your employer in dealing with a demand from HMRC.

The Waiver

This clause represents the crux of the agreement for the employer and as such it will be drafted as widely as possible to ensure that all of your potential employment law claims are settled (2)  (hence why you will often see the inclusion of a whole raft of claims that have no relevance to your circumstances).

Do not be surprised to see a waiver that extends to claims made anywhere in the world, as well as to any future claims. Generally the only exclusions you will see to a waiver of this nature relate to: (1) your right to enforce the terms of the agreement; (2) your accrued pension rights; and (3) personal injury claims of which you are not aware.

Employee warranties

It is usual for the agreement to include certain warranties covering the return of the employer’s property, obligations regarding confidential information, as well as certain confirmations in relation to the independent legal advice you have received.  You may also be required to warrant that you have not committed any act which would amount to a breach of your contract of employment allowing your employer to terminate without notice and in some cases, that you have not received an offer of employment before entering into the agreement.

Legal adviser

You will see many provisions related to your adviser as these are required for the waiver to be valid (3). Payment of sums due to you under the agreement will be linked to not only your execution of the agreement, but also your adviser completing the certificate attached to the agreement.

Confidentiality/non-disparaging comments

It is standard for a settlement agreement to include terms requiring you to keep the circumstances surrounding your termination, as well as the terms of the agreement confidential (subject to some limited carve-outs). In some cases you may even be required to keep the existence of the agreement confidential.

In addition, it is standard for you to be required to enter into an obligation not to make disparaging comments about your former employer, its products/services or its employees.

You should consider whether you wish to request that these obligations be made mutual, if this is not already the case. In addition, you should think about whether there are any further exemptions that you will require in order to comply with these obligations, for example, do you need to carve out a right to speak to future employers (and their representatives) about the circumstances of your termination?  

Beware the Entire Agreement clause

This clause serves to prevent you from later trying to rely upon any earlier agreements that may have been reached between you and the employer before entering into the agreement. If for example you have been promised continuation of healthcare or favourable treatment in respect of your share options, make sure that this is reflected in the agreement.

Claw-back provisions

Many agreements will include a provision entitling the employer to claw-back some or all of the payments made to you under the agreement in the event that you are found to be in breach of your obligations. Whilst in some cases such clauses may not be enforceable (on the basis that they amount to penalty clauses), the safest way to deal with such a clause is to ensure that you properly understand your obligations and are able to comply with these.

Agreed reference/announcements

It is standard practice to include a copy of the reference appended to the agreement and in certain circumstances to agree the wording of any internal or external announcement about you leaving.

Finally…

Whether or not you agree to enter into the agreement will require you to carefully weigh up the value of your potential claims (including the cost to you – financially and emotionally – of going through litigation) and what is being offered to you under the agreement to settle those claims. To ensure that you make the right decision, do make sure you provide your legal adviser with all of the necessary information regarding your employment and its termination and how you reached this point so that you can be properly advised.


IMPORTANT: The contents of this page are general guidance only and should not therefore be regarded as constituting legal or other advice.


Footnotes

(1) The terms of the agreement will be tailored to the circumstances of your termination of employment, as well as to you role and existing contractual rights and obligations. Where you are in dispute with your employer/former employer and have for example raised a grievance or issued a claim, it would be usual to see express provisions dealing with the withdrawal of these. There may also be additional provisions relating to your contractual entitlements and obligations, by way of example provisions dealing with the treatment of your incentive awards, post-termination restrictive covenants and resignation from directorships.

(2) There are certain limited statutory claims which cannot be waived under a compromise agreement and your adviser will be able to point these out to you if relevant.

(3) The adviser must be named in the agreement, must have a current contract of insurance or professional indemnity insurance and is required to take you through the terms and effect of the agreement (in particular the potential claims that you are waiving). The adviser’s certificate and provisions in the agreement reflect these requirements in order for the compromise agreement to be effective.

By Anna Birtwistle – Employment Associate Solicitor at CM Murray LLP Solicitors.

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