Listening and protecting

Standard Terms Explained

Settlement agreements have become increasingly standardised.  Set out below is a guide of the terms you would normally see in a settlement agreement.

The Parties

It seems obvious but check that the Company named is in fact your employer or the company which is obligated to pay you (or the company you own shares or share options in). It is possible for more than one employer to be named, especially if you have group shares or share options.

Recitals

This section may start with the word “Whereas”. This section generally sets out the background facts to the agreement (including the reason for termination, the date of termination and references to notice and the aim to settle all claims).

Remember if you think the employer might have claims against you make sure these are settled as well.

Termination Date/Notice

Are you being paid in lieu of your notice period and is the termination date immediate (or soon). Generally, if this is the case your notice pay will be subject to income tax and National Insurance deductions. However, if there is no payment in lieu of notice (PILON) clause in your contract of employment it may be possible for notice pay to be paid without deductions.

Are you being asked to work your notice or being put on garden leave before the termination date, in which case what are the terms applicable to this period (Are bonuses or commissions to be paid? Are you expected to do a handover?) If this is the case you may be asked to sign the agreement twice, once immediately and once at the end of the notice period. This is so that the employer can confirm settlement of any claims that might arise during the notice period.

Definitions

Some agreements separate out the definitions used within the compromise agreement. Although these will generally be obvious they should be checked carefully especially if payments and the Termination Date are defined and detailed in this section.

Termination/Compensation Payment

This is the payment the employer is making to settle all your claims and to compensate you for the termination of your employment.

Up to £30,000 may be payable without deductions of tax or National Insurance.

This payment may include a statutory redundancy payment. (Redundancy Payment Calculator) 

If you were to take a claim against your employer, any claim is normally calculated by reference to future loss of earnings, in other words what your net losses would be until you find new employment (based on your previous net earnings)*. This is therefore often the basis upon which a settlement payment is based. The main exception to this is that a tribunal can award a level of additional compensation for injury to feelings and personal injury in discrimination claims (but this is rarely more than £30,000).

* Currently the maximum compesnation which can be awarded for unfair dismissal is £78,962.  Discrimination and Whistleblowing claims are unlimited but still largely based on loss of earnings.

Statutory Redundancy / Basic Award

Statutory Redundancy / Basic Award payment* is calculated by multiplying your number of completed years’ service up to a maximum of twenty (x 1.5 for each year of service over 41 and x 0.5 for service under the age of 22) x your weekly gross salary (up to a maximum of £479 per week).

Redundancy Payment Calculator

* To be entitled to a redundancy payment you need to have 2 years’ service with your employer.

Unfair Dismissal

Unfair Dismissal** is the most common individual employment claim, which is based on the employer either not have a fair reason for dismissal and/or not following a fair procedure. 

Compensation for claims for unfair dismissal (other than those linked to discrimination or whistleblowing) is currently limited to £78,962 (plus a Basic Award (see above)).

**Under normal circumstances you need 2 years’ service to be entitled to claim unfair dismissal.

Tax Indemnity

Although your employer may be willing to pay the termination payment tax free, it will normally seek an indemnity from you that if HMRC challenge this payment and state that it is taxable then you will be responsible for any additional tax (interest and penalties etc). 

In our experience this is rarely called upon and is more likely to be checked if the termination payment is £30,000 or more.

You should ensure that you are not liable for any tax, interest or penalties caused by the delay or default of the Company and if necessary seek to redraft this clause.

Confirmation of Statutory Compliance

There will be several clauses to confirm that the agreement complies with the statutory requirements these are standard and will be explained by your advisor.

Confidentiality

There are normally two elements of confidentiality contained in a compromise agreement.

  1. The confidentiality of the agreement. Employers will not want the agreement or the payment discussed with third parties in particular other employees. Sometimes they will go further to say that the existence of the agreement should be kept confidential. Make sure you maintain this confidentiality even prior to signing and make sure you are able to say why you have been dismissed (i.e. made redundant) if this is important.
  2. As an employee you owe your employer (and former employer) an ongoing obligation to keep its confidential information and trade secrets confidential. It is also normal for this obligation to be repeated and made more specific within the compromise agreement. It is also becoming increasingly common for employers to assert that contacts held on employees mobile phones and other devices belong to the Company and should be removed. If this is concern raise it with your advisor.

Property

You will be expected to return all property, documents and data and are also likely to have to confirm that you deleted any company data from personal computers etc.

Sometimes employers will allow employees to keep their mobile phone or laptop or transfer their mobile phone number, so long as the employee takes over responsibility for any costs. 

If you want to keep any company property make sure this is covered in the agreement.

Full and Final Settlement

Depending on the style of agreement there is either a list of specific claims being settled or a long list of every possible employment related claims, which for example will have a man settling pregnancy related claims!

Employees will be expected to confirm the agreement is in full and final settlement of all their claims against their employer (and normally all of its directors and employees and perhaps group companies).  They will also be expected to confirm that they have informed their advisor of all relevant facts and that they have not and will not take any claims.

Make sure you tell your advisor about any claims or comlaints you have before signing the agreement.

You should be careful that the following claims are excluded from the list of claims to be settled: unknown (latent) personal injury claims, claims related to accrued pension claims and any claim related to the enforcement of the compromise agreement itself.

Warranties

These could otherwise be described as additional promises to be made by the employee (although there is nothing to stop this being from both employer and employee).

These may include:

  • That you have not breached your contract of employment;
  • That you have not already breached any of the terms of the Compromise Agreement;
  • That you have not already got another job or job offer; or
  • That that if you do sue your employer (in breach of the agreement) you will reimburse the employer for their costs and if any compensation was awarded.

Compromise Agreements sometimes include a clause saying that if you breach the agreement you will repay the monies paid to you under the agreement.  Under normal circumstances such clauses are unenforeable as they are an unreasonable penalty.

If you are a director you may be required to resign under this section or a separate section.

Non-Derogatory Statements/Announcements/References

Employers will nearly always seek to ensure that former employees do not say anything bad about them after leaving.  Employees are advised to ensure this clause is mutual.  (Employers may use wording that they will use their reasonable or best endeavours to prevent negative comments, this is because the Company will not be making the comments itself (it will be its employees)).

If it is appropriate or wanted compromise agreements can include both internal and external announcements in respect of your exit.

In terms of references, employers normally seek to limit these to factual confirmation of role and dates of employment but at times it is possible to improve on this especially if the additional information is objective and factual.

Other Terms

The Agreement may be marked Without Prejudice (subject to Contract), this means that its terms cannot be relied upon (or referred in court) until it is signed.

Watch out for any deadline contained within the agreement these can be extended but it is best to ask early.

Contractual Payments/Benefits

Payment of your salary, benefits and pension should all be confirmed to the termination date. You should also be paid all accrued but untaken holiday to the termination date.

A point of possible negotiation; holiday which would have accrued during notice.

This section should also cover any additional contractual payments such as commissions or bonuses which would still be payable on termination. It is not unusual for employers to specifically state such payments are not due on termination, as such the terms under which such payments are made should be checked. This can sometimes be negotiated.

If you have any outstanding expenses you should make sure these are submitted and paid or this is at least confirmed by the agreement.