What are the usual terms of a Settlement Agreement?
A settlement agreement will set out a number of long statutes which you agree not to pursue a claim under, such as the Equality Act 2010, the Employment Rights Act 1996 and many others. This is entirely usual.
The other main terms of the settlement agreement and what to look out for are as follows:
- If you are not working your full notice and being paid “in lieu”, this should clearly be stated in the settlement agreement.
- The first £30k of the compensation payment is usually allowed to be made free of tax and NI deductions, so the settlement agreement will need to reflect this. Any redundancy payment that is being made is included in the £30k sum. In some circumstances, your notice period can also be included in the tax free sum but only if there is no PILON (pay in lieu of notice) clause in your contract of employment. You will have to give a tax indemnity in the agreement, but this is standard. Click here for more information on this.
- You may want a “non-derogatory clause”, so that your employer cannot bad-mouth you to any third parties. Not all employers will agree to this as it is impossible to police by large scale companies, but most should at least agree to use “their best endeavours” and in some cases will agree to name specific individuals. You will normally be asked to agree to a reciprocal clause.
- An agreed job reference should be attached to the settlement agreement wherever possible, together with a clause that no oral references will be given in any less favourable manner. Remember, an employer is not otherwise obliged by law to provide a job reference, let alone a positive one, which is why it is best to bind them to it in the settlement agreement. Click here for more information on job references
- Make sure that no post- termination restrictive covenants are introduced into the settlement agreement unless you have already agreed to this in your contract of employment. Even where you do have pre-existing restrictive covenants, you may want to consider negotiating with your employer for a variation or waiver of these in your settlement agreement so that they are less onerous.
- Make sure your settlement agreement does not unduly restrict you from talking about the reason for your departure to other people. After all, you will need to inform your future employers and family at the very least.
- There will be a clause obliging you to return company property within a set time period. Make sure you can comply with both the return of property and the time frame for their return. Consider also whether you want to retain your mobile number as this will need to be addressed before you leave.
- Are you owed an outstanding bonus? Make sure that the agreement properly reflects what bonus is due to you, and when it should be paid. If you work for a bank, your settlement agreement may be partly paid as deferred stock after you leave and this will need to be covered in the agreement. Also make sure any stock options and share awards under your employer’s equity plans are also covered. Click here for more information on this
- Your outstanding accrued but untaken holiday will need to be paid and included in the settlement agreement. Sometimes, it is better to specify the actual number of days owed. These payments are subject to tax.
- Legal fees- make sure the contribution is sufficient. Many employers will contribute between £250 and £500 plus VAT for your lawyers fees, but some are less generous.
- You will often be asked to waive any rights to a personal injury claim that you may have. It is not possible to do this for future claims that you may be unaware of, but you can validly exclude known PI claims up to the date of the settlement agreement. Make sure you don’t agree to this if you think you may have a work related PI claim that you will want to pursue at a later date.
- You will be asked to keep the settlement agreement confidential. This is important and you should resist the temptation to talk to colleagues about what you are receiving under the agreement.
- Your termination date may be many months away. In these circumstances, you will often be asked to sign a first settlement agreement now and a second one at the later time of termination. Such “2 tier” agreements do leave you exposed somewhat as you will have already compromised your rights after the first signing but will not receive benefits under the agreement until the second signing. This should be discussed carefully when you obtain legal advice.
- You may have another job to go to at the time your settlement agreement is signed, yet you could be asked to warrant that you have not been offered a new job. You need to inform your lawyer if you do have a new job as there may be an opportunity to amend this clause- or you could otherwise be in breach.
- You will often be given a deadline to sign the agreement. Don’t be too concerned about this as it can often be extended. You shouldn’t let your employer pressure you into accepting a settlement that you may later regret. Unfortunately, this is a tactic that is used all too often by employers.
- Above all, be aware that once you sign the settlement agreement, there is no going back! Together with your employment lawyer, you need to decide whether the amount of compensation on offer properly reflects your entitlement. In genuine redundancy situations, your options can be more limited, but in other cases there will be scope to negotiate an increase on the severance sums.