Detailed Information about Settlement Agreements and Senior Exits

What Are Settlement (Or Compromise) Agreements?

Settlement agreements are a tool used by employers to settle any legal disputes that employees may have against them. They are predominantly used when the employment is coming to an end. In short, the employer ‘settles’ any claims that the employee may have against them by making a payment to them. In return, the employee is unable to bring any claims against their employer once the agreement has been entered into. Examples of these claims include unfair dismissal, discrimination, bullying or harassment, amongst others.

Settlement agreements have become increasingly common so the clauses provided are often standard. Many cases involve straight-forward agreements where there is in fact no claim against the employer. However, it is still important that the settlement agreement is checked before being signed as it is still a legally binding contract which will restrict the employee in many ways.

After Entering Into A Settlement Agreement, Can Employees Bring Legal Claims Against An Employer?

In short, No.

Settlement agreements prevent employees from bringing the majority of their claims against their employer. However, an employee may still bring claims relating to:

     
  1. Any work related injuries of which the employee is not aware at the date that they sign the agreement at the very least;

  2. Any accrued pension rights;

  3. Any claims arising from a breach of the settlement agreement itself such as not being paid any termination payment;

  4. Any share options (if applicable).

If the settlement agreement does not refer to “excluded” claims, employees should speak to one of our lawyers.

Do Employees Have To Sign A Settlement Agreement That They Have Been Given?

No, not at all.

It is solely down to the employee to decide whether they wish to enter this agreement and drop any claims that they may have. If the employee does not decide to enter into the agreement, they technically remain in employment until it is terminated through an alternative method, such as redundancy or dismissal, and they have been formally dismissed.

Often, the employee will receive less or no money if their employment is terminated by one of these methods or the employer becomes insolvent.

Taking this into consideration, it is highly advised that employees consider both their and their employer’s circumstances carefully before making a decision as to whether they enter a settlement agreement.

If you require further advice on this, speak to one of our lawyers.

When Will Employees Be Paid Any Payments From An Agreed Settlement Agreement?

The settlement agreement must explicitly state when each type of payment will be made to the employee and the employer must then comply with this. Payment is normally made up to 28 days from the execution of the agreement. We can negotiate any payment dates for you if you so wish, please speak to one of our lawyers.

How Do Employees Know That They Have Been Offered The Correct Amount Of Money?

The amount of money received under a settlement agreement varies depending on the individual circumstances of the employee and their personal contractual entitlements. There are a number of different components which make up the payment received under a settlement agreement:

Redundancy or severance payments: These are often worked out using a set of calculations which are either a contractual right with the employer or a statutory right in law. Employees must check the calculations with the figures that have been offered or seek detailed advice and assistance from one of our lawyers.

Contractual payments: Commonly, employees are entitled to notice pay, untaken holiday and any other contractual entitlements. However, these are usually not offered when there has been a case of gross misconduct by the employee.

Legal disputes: These may have a potential value which can be reflected in the payment made under the settlement agreement. If an employee believes that they have a legal dispute with their employer, they should speak to one of our lawyers.

What Is The Position Of Tax And National Insurance For Settlement Payments?

The tax and national insurance contributions (NICs) for termination payments depends on the type of payment and the amount paid for each type subject to an overall cap of £30000. The payment should be termed as ‘compensation for loss of employment’ or similar.

Generally, settlement agreements contain some payments which are taxable and some that are not.

Normal notice periods and other payments are taxable. Pay in lieu of notice (PILON) can be tax free except for when the employer has a clause in the contract allowing notice pay to be paid in lieu or there is a risk of auto-pilon.

A settlement agreement will usually ensure that the employee “protects” the employer for any tax payments to be made to the tax authorities. Therefore it is important that you are completely clear on the taxable position of each and all of payments offered in any settlement agreement.

There can be complicated rules on settlement agreement tax and you should seek full legal advice. Our lawyers can guide you on the taxable aspects of the settlement agreement in conference and/or provide you with formal tax advice via our specialist tax team should you require it.

What Can Employees Say About Their Settlement Agreement Once It Has Been Executed?

The majority of settlement agreements contain confidentiality clauses which aim to restrict what can and cannot be said (and to whom) once signed. It may even be the case that the settlement agreement ‘gags’ the employee so they cannot talk about all matters relating to the termination of employment. However, it is vital that the settlement agreement permits employees to discuss these matters with a select number of people, such as immediate family, recruitment consultants, future employers and welfare benefits advisers as well as when legally required to do so. Additionally, employees must be able to discuss the facts and figures of their settlement agreement with their lawyer. These points must therefore be reflected in the terms of the settlement agreement. Moreover, employees will remain to be bound by the confidentiality clauses contained in their contracts of employment.

Nevertheless, confidentiality clauses contained in settlement agreements do not cover protected disclosures by employees under whistle-blowing legislation. Even if the settlement attempts to prevent an employee from ‘blowing the whistle’, this clause will not be valid.

In most cases employees will only be able to discuss the facts and figures with a limited amount of people, e.g their lawyer.

If you have any concerns about the confidentially provisions, please speak to one of our lawyers.

We will be happy to advise you in conference about confidentially.

Do Settlement Agreements Restrict Freedom Of Speech?

Confidentially clauses stop employees from discussing their settlement agreement. However, confidentiality clauses do not prevent individuals from making protected disclosures in the public interest under whistleblowing legislation. Any provisions in the settlement agreement which aim to restrict this are unenforceable.

If you have any concerns about the confidentially provisions, please speak speak to one of our lawyers.

Do Employers Have To Provide Employees With A Reference In Their Settlement Agreement?

There is no legal requirement for an employer to provide an employee with a reference upon termination of their employment. However, references are very important to those employees who will be seeking future employment. Therefore, it is often agreed between the parties that the employer will provide a reference and it should be attached to the settlement agreement. Our lawyers would be happy to negotiate any aspects of the reference if needed. To learn more about references, please follow this link: https://www.gov.uk/work-reference

What Can Employees Say To Future Employers About Their Last Job?

If the agreement does not allow the employee to speak to future employers or recruitment consultants, it is highly recommended that you seek to amend the agreement. Employees should be permitted to speak with future employers as well as their immediate family and legal advisers. Our lawyers can advise and negotiate these points for you.

Should Employees Be Concerned About The Reason Given For The Termination Of Their Employment?

Yes.

For example, if the reason given for termination of employment is ‘resignation’, this may have an effect on an employee’s later applications for welfare benefits like job seekers allowance, insurance claims for loss of employment and entitlement to pension benefits.

More information detailing how these may be affected can be found at the Department of Work and Pensions and/or from any insurance or pension providers.

We will be happy to negotiate on your behalf if you have any issues with the reason given, please speak to one of our lawyers:

What Do “Non Derogatory” Type Clauses Mean?

Non derogatory clauses stop employees from ‘bad mouthing’ their employer to any third party such as the press or posting any deprecating material about them on social media outlets such as Facebook and/or twitter.

Employees should not post anything on social media or release anything to the media before being advised as this may jeopardise the whole agreement. In addition, any discussions that employees may want to have about their employers or the circumstances surrounding the settlement agreement should not be made until they have been advised by one of our lawyers. It should also be noted that often, confidentiality and non-derogatory clauses apply to the period of time before the agreement has been signed.

Can Employees Say What They Think About Their Employer Or the Circumstances Surrounding The Settlement Agreement Before It Is Signed?

Discussions about employers should not be held until employees have been advised by one of our lawyers and are clear on what can and cannot be said. Often, confidentially and non-derogatory clauses apply before the agreement is signed so it is best to wait until the end of the advice process.

Frequent Clauses In Settlement Agreements

 
  • Continuation of benefits after employment - such as healthcare, life assurance, etc etc. The agreement should make clear if, and for how long, these benefits continue.

  • Pension enhancements/transfer – employer's pension contributions and the employee's entitlement to, or transfer of their pension will be required in the agreement.

  • Return/purchase of company property - these clauses deal with the return or purchase and transfer of company property such as a company car and normally there is a date for the return of such property.

  • Contribution to legal fees – As the employee is required to obtain independent advice in order for the agreement to be binding and it’s incurred by the employee in the interests of the employer, it is common for the employer to meet all or some of the contribution to the legal fees.

  • Withdrawal of proceedings – If legal claims have been brought by an employee then the agreement will normally confirm that the employee will have to withdraw the legal proceedings. The settlement sum (if any) that the employee is receiving is provided in return for withdrawing the legal claims.

  • Employee promises or “warranties” – These are promises from the employee to confirm that certain facts are true. For example, that they do not have another job offer (as this may affect the amount of compensation) or that they have not committed a breach of contract which may otherwise allow the employer to terminate the contract.

  • Resignation from all directorships, offices, trusteeships – As well as being an employee an individual may also be a director, office holder or trustee. These posts will not automatically end at the same time as employment; an employee director/office holder/trustee will normally be asked to resign or retire.

  • Restricted notice or “garden leave” - the period, restrictions and conditions on the employee are often stated here. This sometimes includes an exclusion from the employers premises, prohibition on access to IT systems and/or any limited support/assistance that the employee is expected to provide.

  • Restrictive covenants – These stop or restrict former employees doing certain things such as dealing with the employer's customers or poaching former colleagues. Employees should check the contract of employment to see if they existed. If there has been a breach of contract it is likely that these covenants will not have any effect but any employee who believes they have these restrictions should speak to one of our lawyers in conference.

Senior Executives/Employees

Settlement agreements for senior executives/employees, such as directors and senior executives, generally vary from other forms of settlement agreements. This is due to the fact that additional factors need to be negotiated and agreed with their employers. It is therefore essential that legal advice is sought when drafting and negotiating the terms of the settlement agreement for senior employees.

 
  • Share options - Senior employees often will have share options which they have not yet exercised. Additionally, if the share options have been exercised, the shares may need to be transferred back after the negotiation and acceptance of a fair price for them. These must be dealt with under a settlement agreement in addition to any tax considerations there may be.

  • Restrictive covenants - Senior employees will have regular access to confidential knowledge. Evidently, employers are wary of the risk that they may use this information to directly compete with, or even steal former colleagues, contacts or clients, from them. Although contracts of employment often contain covenants which protect employers against this threat these may no longer be enforceable if the contract has been breached. One benefit of creating a settlement agreement is that it provides an opportunity for an employer to re-impose, or even amend, these covenants which may consequently need to be met with additional compensation from the former employer. Legal advice must be sought to determine the reasonableness of the restrictive covenants and the compensation offered. .

  • Retirement as director/loss of office- Any directorship/office you hold will not cease at the same time as your employment. The settlement agreement will therefore address this and it is common for directors to agree to resign on termination. Any compensation for loss of office should be negotiated between you and your former employer.

  • Company property - As part of your role, you may have the benefit of a company car, mobile phone, laptop/tablet. These are usually returned to your employer by a certain date however, it may be possible to negotiate the transfer of this property to you.

  • Announcements - The settlement agreement should address the issue of an announcement, be that to your former colleagues and to the market. This could be especially relevant in terms of your reputation and that of your former employer.

  • References - A reference is perhaps one of the most important considerations to you. You will want to ensure that you have the best possible reference, especially when there may be factors which could potentially affect your employability if disclosed to a prospective employer.

    The agreed reference is therefore an area for negotiation which does not involve financial considerations. Caution should however be exercised if you are working within the financial services industry and are regulated – your employer is under various duties to disclose all relevant information regarding you and to do otherwise, would be an offence.

  • Garden leave - Due to your influence within the organisation and your access to confidential information your employer may decide to place you on garden leave for all or part of your notice period. During this time all benefits under your contract continue but you will not be required to work and may be prohibited from entering your employers premises and speaking to former colleagues.

What Are The Conditions That Need To Be Met For A Settlement Agreement To Be Valid?

The mandatory requirements are as follows;

     
  • The settlement agreement must be in writing

  • The settlement must specify the proceedings being “given up”

    All potential claims that the employee might have must be specified in the agreement.

  • The settlement agreement must confirm that the employee has obtained independent legal advice from a relevant adviser

    The adviser’s role is to advise on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue claims against the employer. In practice, we can also advise and assist on the strengths of any legal case and ensure that the employee is receiving adequate compensation.

    As advice is necessary for the agreement to be binding it is common for the employer to agree to pay a contribution to the employee’s legal fees.

  • The settlement agreement must identify the relevant adviser and confirm that they are insured

    The identity of the adviser must be detailed in the agreement, together with confirmation that they have a current contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from that advice.

  • The settlement agreement must state that the applicable statutory conditions have been met

Useful Guides

You may find the following guides to settlement agreements useful:

ACAS (Advisory, Conciliation and Arbitration Service) - Settlement Agreements: A Guide

ACAS (Advisory, Conciliation and Arbitration Service) - Settlement Agreements: Code of Practice

Department for Business Innovation and Skills - Enterprise and Regulatory Reform Act 2013: A Guide

Department for Business Innovation and Skills - Ending the Employment Relationship: Government Response to Consultation

Other Useful Links

This link aids employees in working out their basic award for unfair dismissal and whether the award can be reduced by the employment tribunal.

Employment tribunals - how to work out your basic award if you are claiming unfair dismissal (Citizens Advice Bureau)