What are the usual terms of a Settlement Agreement?
The settlement agreement often sets 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.
In essence, the main terms of the settlement agreement and the things to look out for are as follows:
- The background circumstances to the settlement agreement are usually set out in the first page, including the reason for termination of your employment and what claims you are actually compromising with your employer. You need to make sure the reason for your departure is accurate. If you need to make a claim on your redundancy insurance policy for example, then the agreement should reflect redundancy as the reason for your departure and no, for example, a “mutual termination of your employment”.
- If you are not working your full notice and being paid “in lieu”, this should clearly be stated in the settlement agreement.
- Make sure that the first £30k of the severance payment is expressed to be free of tax and NI deductions for any compensation payment (this includes a redundancy payment that is being made). In some circumstances, your notice period can be included in the £30k 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.
- 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.
- Make sure that no post- termination restrictive covenants are introduced into the settlement agreement unless you having already agreed to this in your contract of employment. Even where you do have pre-existing restrictive covenants, you may want to consider asking 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 phone number as this will need to be addressed in the settlement agreement.
- 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, you settlement agreement may be partly paid as deferred stock after you leave employment and this will need to be covered. Make sure any stock options and share awards are also covered.
- 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.
- Legal fees- make sure the contribution is sufficient. Many employers will contribute up to £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 do this if you think you may have a work related PI claim as the appropriate exemption will need to be carved out in the agreement.
- 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 the 1st settlement agreement now and a 2nd one at the time of the termination. Such “2 tier” agreements do leave you exposed somewhat as you will have already compromised your rights after the first signing but cannot receive benefits under the agreement until the 2nd signing. This should be discussed carefully with your lawyer.
- 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, and unfortunately it is a tactic that is used all too often.
- 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 will be more limited, but in other cases there will be scope to negotiate on the severance sums. It will be too late, however, once you sign the agreement.