Settlement Agreement

Common Clauses Guide

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Settlement agreements can be a valuable tool in resolving workplace disputes, benefiting both employers and employees. However, they require careful consideration and legal compliance to ensure mutual benefit and protection for all parties involved.

Each agreement is different but there are certain clauses you can expect to see in a settlement agreement although the wording can differ quite wildly from one to another. This comprehensive guide will help you understand the common clauses contained within a settlement agreement and will cover the following:

> Termination date

> Background information

> Contractual payments

> Compensation for loss of your job

> Notice Pay

> Payments in lieu of notice

> Waiver of claims

> Negative comments clause

> Confidential Information

> Work References

> Social Media

> Negative Comments

> Affirmation clause

> Post termination restrictions

Termination date

This marks the end of your contract with your current employer. All payments outlined in the contract typically stop on this day.

Background information

This will set the scene for the settlement agreement and will often include the reason for the proposed termination of your job such as ‘redundancy’ or ‘mutual agreement’ and confirm the settlement agreements purpose – to settle all potential claims against your employer.

Contractual payments

This part of the settlement agreement will explain what final payments you will receive for salary, benefits, expenses, untaken holidays, unpaid bonus and commissions payments.

Compensation for loss of your job

This will often be referred to as a ‘Termination Payment’ or ‘Ex Gratia’ payment. This is the sum of money your employer is offering as compensation for loss of your job. The money offered is designed to settle the claims you are being asked to waive as part of the settlement agreement. It is important that you are able to properly assess the potential claims you may have against your employer and their value. If the sum offered is too low, we can assist you with negotiating more and bringing an employment claim if necessary.

Notice of termination

You are entitled to notice with regards to the proposed termination of your employment contract. This however may not be the case if your employer is terminating without notice for say 'gross misconduct'. If you are still entitled to notice you may be required to work your notice and this will usually tie in with your termination date. Alternatively, your employer may agree to pay you your notice period in lieu which means you are not required to work your notice and you receive the money upfront in your hand. The length of notice will be the statutory minimum unless your employment terms provide a longer period.

Payments in lieu of notice

All employees are entitled to the statutory minimum notice for termination of their employment. You may be entitled to more notice in your contact or terms of service. You will usually be required to work your notice period unless the employer agrees to pay you in lieu of notice. This simply means you will receive payment of the wages you would have received had you worked your notice without having to work. The benefit of this is two fold. Firstly you do not have to work your notice period and secondly you can often leave your job sooner. If you are required to work your notice we may be able to negotiate a payment in lieu in certain circumstances.

Pension

The settlement agreement will explain what happens with any pension entitlements you have following termination. If you have a company pension, your employers contributions should continue until your termination date. If your employer has agreed to pay your notice in lieu they may also be obliged you make a contribution into your pension under your employment terms. You may also wish to make a voluntary contribution into the pension to take advantage of any remaining tax saving allowance. A good settlement agreement solicitor will be able to re-draft your agreement to ensure it takes advantage of tax savings with voluntary pensions contributions.

Tax

All payment you receive will be taxed at source. However, if you are due to receive any payments which are compensatory in nature for loss of your job, these will usually be tax free up to a maximum of £30,000. This means you will receive the payment gross of income tax and national insurance contributions.

Tax indemnity

If you are in receipt of any payments which are gross of income tax and national insurance, most employers will insert a tax indemnity clause which protects the employer against any tax liability arising in connection with your settlement agreement payments. This make sense because the tax that the employer would under normal circumstances have paid to HMRC, has been paid to you when you received any compensation payments as a gross amount.

It is important to ensure your liability under this clause is limited to employee national insurance contributions only, with no liability for penalties, costs or interest.

Shares

If you are a senior employee an important consideration will be any share options and shares you have with the employer. Often the settlement agreement must be read in conjunction with the agreements of any share schemes. The terms of such schemes frequently require you to be classed as a ‘good’ leaver rather than a ‘bad’ leaver to take advantage of shares options upon termination. If your share options are particularly valuable it is important you are classed as a ‘good’ leaver.

Further, if you are an employee shareholder your exit may affect how your shares are treated, and even their value. For example, there may be clauses in the company’s articles of association or in the shareholders’ agreement triggering the automatic sale of an employee’s shares upon departure, which would likely have a negative effect on the share price.

Waiver of claims

The primary purpose of the settlement agreement for the employer often is to ensure there is a clean break in the relationship by securing your agreement not to bring any of the specified claims once the settlement agreement has been signed. The claims you cannot bring should be set out in the settlement agreement. The claims you will always be permitted to bring irrespective of the wording of the agreement will be any personal injury claim you were not aware of at the time of the agreement, any claim for accrued pension rights or any claim to enforce the terms of the agreement itself, if for example you are not paid the agreed compensation.

Negative comments clause

Employers will often require a clause which restricts you from making derogatory or critical comments about their organisation, owners directors and employees. It is important that a mutual clause offering you the same the protection is included, particularly if your departure is on the back of a dispute or breakdown in the relationship.

Confidential Information

Confidentiality clauses will often be found in most settlement agreements. It is important you fully understand your obligations under these clauses as a failure to follow them will be considered a serious breach by your employer. We can ensure there is a similar clause to ensure your employer is also obliged to keep the agreement confidential.

Work References

It is important that you give consideration to whether or not a work reference would assist you in securing gainful employment in the future, if you agree to leave your current employment. There is no legal obligation on an employer to provide a reference for former employee’s however if there is a clause in the settlement agreement, the employer has no choice but to comply with terms of the agreement. We can assist you with securing a reference, whether that is a brief background reference or a more detailed reference if you have worked for the employer for a long time.

Negative Comments

This is one of the most common clauses within a settlement agreement. Employers will often require a guarantee that you will not make any negative, disparaging or negative comments about the employer, their directors and employees after termination. The clauses will often extend to cover social media comments and posts. We would expect a reciprocal clause to cover you against negative comments particularly if you are leaving after signing the settlement agreement. If your agreement does not have a reciprocal clause, we can negotiate the wording and inclusion of an appropriate clause for you.

Affirmation clause

If you are required to sign an affirmation letter or agreement, this is because you are entering into the settlement agreement some time in advance of the date on your employment actually ends, there is a risk that further claims may arise in the interim, which would not be effectively settled by the settlement agreement. The employer has therefore asked you to sign, after the termination date, a separate ‘reaffirmation’ letter/agreement, which confirms that you also settle those further claims.

Post termination restrictions

These are restrictions on your ability to do something after termination and often include being bound by confidentiality clauses, not being allowed to work for a competitor and not poaching staff members or customers/ clients. It is important that you check your employment contract and any other agreement you may have signed during the course of your employment and this may make it difficult for you to secure a job or working in a self-employed capacity. Your employer may have included ‘new’ restrictive covenants in the settlement agreement. If you have a problem with these clauses, we can help negotiate the removal or variation of the restrictions imposed.