Settlement Agreements the Key Terms

This is a note about some of the key terms which are frequently contained in Settlement Agreements. It is not a substitute for individual advice as it is a pre-prepared advice on some of the issues that will arise in your Settlement Agreement. 

Nearly all Settlement Agreements contain a term which makes an “ex gratia” (i.e. non-contractual) payment to the employee. This payment is usually made without deduction of tax up to a threshold of £30,000. The provision relies on a tax exemption which permits a £30,000 tax free allowance for termination of employment or loss of office payments. The law recently changed and now Companies are required to pay tax on Notice Pay so the ability to get tax free ‘damages for breach of contract’ has stopped and it is not possible to reduce the notice payment and increase the ex gratia payment to mitigate tax exposure. 

If the £30,000 allowance is used companies invariably want a contractual right to claim back any tax that should have been deducted. This is in case HMRC ever challenge the tax treatment. Such a contractual right is called a tax indemnity and you will find such a clause in most Settlement Agreements. These clauses are common in most (almost all) settlement agreements.

It may be possible to try to delete the tax indemnity, however this type of request usually fails. It is more common to negotiate amendments to the clause which will make it less onerous, or an amendment which will give the employee greater control over any negotiations with HMRC. It may be possible to prevent the company admitting it owes tax before the employee has an opportunity to take it up with HMRC or a Court. The key concern with these indemnity clauses is to ensure that the clause does not create a risk of tax being applied to non-contractual ex-gratia payments.

Clauses about company property appear in all settlement agreements and are not normally an issue. Occasionally there are complications with company vehicles where they are being retained by the employee for a period after the termination of employment (for example through to the end of the notional notice period). In these cases it will be necessary to negotiate an amendment to the agreement to allow the employee to retain the vehicle. It would also be necessary to negotiate an exemption if you wished to retain the telephone number of a company mobile telephone.

This is a slang way of describing a requirement not to say or do anything that brings the company into disrepute or to be rude about it. Ideally these clauses would be “mutual” (apply to both sides). This can be difficult for large employers who may be reluctant to agree to anything other than they will use their “best endeavours” to ensure that no employees make derogatory statements. 

There will also be a requirement to keep things confidential and not to refer to the settlement agreement or the amounts paid. This is common (and sensible) to avoid other members of staff discovering the value of a settlement pay out.

It is usual for a settlement agreement to attach a “agreed reference” which will be used by the business in response to any future reference request. If you want an agreed reference, we advise that you start writing it as soon as possible because often the terms of the reference can slow down the completion of the rest of the Agreement. Note that many companies now simply give a standard reference so it might be sensible to only have this.

This can be a complicated issue. Restrictive covenants are clauses that stop you dealing with former customers, or working for certain companies after your employment with the business has ended. These clauses can be valid and enforceable but sometimes that are too vague, or too onerous and are unlikely to be upheld by a Court. In some cases, particularly if the restrictions have become unenforceable, the company seeks to reinstate them or introduce new ones within the Settlement Agreement. We will advise you on the impact of any such terms in your agreement

Settlement Agreements try and settle every possible claim but should not settle personal injury claims, pension claims and claims to enforce the terms of the agreement. We try to ensure that the agreement only settles claims arising out of the employment and its termination and not ‘or otherwise’. In other words, if we see the words ‘or otherwise’ we delete it.

There is usually an ‘entire agreement’ clause at the end of a settlement agreement. It will say that the agreement replaces all previous understandings and arrangements. This is an important clause as if, for example, you have separately agreed that you will get next quarter’s bonus – signing the agreement makes that agreement void.

Do not be surprised if the settlement agreement requires you to re-sign the agreement again in the future. This is common where there is a period between the date when you sign the agreement and the final end date of your employment. This is not sinister as it simply reflects the legal position that a settlement agreement is only effective to settle claims that are known about or exist at the time of the agreement. Thus, in theory if today you sign away your rights to unfair dismissal but are still employed tomorrow you have another claim for unfair dismissal. Of course, the law isn’t that silly – if the agreement is deals with a known termination soon thereafter then even if it is signed before the termination it is still valid. 

Be aware that these clauses can sometimes contain a provision that the employee confirms that they have not been offered an alternative job at the time when they sign the agreement. 

This can be a problem if you have already accepted an alternative role but don’t want to alert your present employer in case they withdraw the financial offer of the settlement. Note that being in beach of a warranty can invalidate the terms of the settlement agreement and expose you tot eh risk that the business may either refuse to pay the settlement sum, or demand reimbursement.

This does not deal with all the points that can arise I the negotiation of a settlement terms, but it does identify some of the common pitfalls. Representation from a specialist employment solicitor can be critical to avoid making a costly mistake

Please do not hesitate to ask me about any of the points above but, of course, during the negotiation period when we discuss the Settlement Agreement, we will discuss all relevant points including, if appropriate, the points above.