Typical clauses in settlement agreements

The typical clauses and terms of a settlement agreement & what you need to know about them.


Notice Pay:

If you are not working your full notice and are instead receiving a PILON (payment in lieu of notice) this should clearly be stated in the settlement agreement.

Benefits:

If you are receiving a PILON (see above) then you are also entitled to be paid compensation for any benefits that you would have received during your notice period.  This is something that is often missed by employers who calculate the PILON payment based on salary alone.

Bonus:

Make sure that the agreement properly reflects what bonus is due to you, and when it should be paid.  Contracts of employment often make bonus payments discretionary and therefore it is often difficult to assess whether any payment is due as an employer must exercise his discretion “reasonably” even when an employee is leaving.

Stock & Share Options:

These can be very valuable and you must make sure that any stock options and share awards under your employer’s equity plans are also covered in the settlement agreement.

Holiday Pay:

You are entitled to be paid compensation instead of your accrued but untaken holiday.  It is often better to specify the actual number of days owed in the agreement.

Compensation:

All the above payments are contractual payments that an employer must pay and are therefore usually taxable.  If you are being made redundant, then there are certain minimum payments that must be made to you by your employer.  However, compensation or ex-gratia sums are usually where the serious negotiations begin.  There is no rule on how much money, if any, must be paid by an employer.  The starting point is to consider how long it will take you to get another job and how much money you will need between jobs.

Tax Free Payments:

The first £30,000 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 £30,000 sum.  In some circumstances, your notice period can also be included in the tax free sum but only if there is no PILON clause in your contract of employment.  It is up to HMRC as to whether tax is actually payable so you cannot simply agree with your employer that no tax is payable.  It is therefore standard practice to give a tax indemnity in the agreement to your employer.

Confidentiality:

You will normally be asked to keep the details of the settlement agreement confidential. This is important and you should resist the temptation to talk to colleagues or others about what you are receiving under the agreement, or make any comments on social media.  However, you need to make sure that your settlement agreement does not unduly restrict you from talking about the reason for your departure to certain other people, such as your potential future employers and your family.

Non-Derogatory:

You will normally be asked to agree to a clause that you will not bad-mouth your employer, a “non-derogatory” clause.  You may want a reciprocal clause that your employer cannot bad-mouth you to anyone else.  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”.

Back Dating:

Sometimes, there will be clauses back-dating the requirements regarding Confidentiality and Non-Derogatory comments.  If you have already made disclosures that would breach these terms then you will need to negotiate a waiver or you will be in breach of the settlement agreement as soon as you sign it!

Restrictive Covenants:

Restrictions on who you can work for next are often an unwelcome addition to settlement agreements even when you already have such clauses in your contract of employment.  You should always consider these very carefully and may want to negotiate with your employer for a variation or waiver of these in your settlement agreement so that they do not prevent you from working after termination of your employment.

Return of Company Property:

There will usually be a clause instructing 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.  You also need to consider whether you want to retain your mobile number and/or laptop as these issues will need to be addressed in the settlement agreement.

Legal Fees:

The employer will usually contribute between £300 and £500 plus VAT for your solicitors fees.  This will normally mean that you do not have to pay your solicitor anything at all, but it will depend on how much negotiating you want your solicitor to undertake.

Reference:

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.  The law does not require employers to provide a job reference, but if they do it must be “fair and accurate.”  So it is always best to bind them to specific wording in the settlement agreement.

2 Tier Agreements:

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 agreement is signed. This should be discussed carefully when you obtain legal advice.

New Job:

If you already have another job to go to before your settlement agreement is signed, then you need to keep this confidential from your old employer as it could jeopardize your ability to negotiate.  In particular, there is often a clause stating that you warrant or promise that you have not been offered a new job, which will need to be amended before you sign or you could be in breach of the agreement immediately.

Deadlines:

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 often used by employers.

Is That Your Final Answer?

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 is acceptable.  In genuine redundancy situations, your options are limited, but in other cases there will usually be opportunity to negotiate an increase on the severance sums being offered by your employer.

 

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