Settlement Agreements - Factsheet

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The legal effect of a Settlement Agreement is that you give up your right to pursue proceedings against your employer. The Agreement is legally binding when signed both by your employer, you and your solicitor (or relevant adviser).

Please note:

  • It is your responsibility to check that the figures in this agreement are correct. Once the agreement is final, you cannot ask for more money. You will only receive the sums set out in the agreement.
  • You should check your contract of employment for ongoing obligations. Often there are provisions which continue after the end of your employment, such as a duty of confidentiality and restrictions on working for a competitor that may still affect you despite the Settlement Agreement.
  • Any counter proposal regarding the terms of a settlement agreement is, technically, a rejection of your employer’s previous offer. If they reject your offer the employer is normally happy to return to the original offer but this is a risk you need to be aware of.

We set out below a list of the more common issues that need to be considered.

1. THE PAYMENT TO BE MADE

  • By what date is the payment to be made? When is the employment to end?
  • Do the payments include:
    • Outstanding salary.
    • Outstanding holiday.
    • Any other outstanding payments to be made such as expenses, bonuses or commission.
    • Notice pay.
    • Compensation.
  • What will happen to benefits in kind such as:
    • Retention of the company car.
    • Continuation of health and any other insurance such as life insurance.
    • Professional memberships.
  • Are any deductions to be made?
    • Will you be required to repay a travel loan or part of it?
    • Have you taken more holiday than you are entitled to pro rata?
    • Might you have to repay any contractual maternity pay?

2. TAX

It is important that the payment to be made is tax effective. YESS do not give detailed tax advice and are not financial advisers. If in doubt you should consult an accountant or a tax lawyer.

  • As a general rule the following payments can be made gross, without deduction of tax:
    • An agreed sum which is for compensation for loss of employment/office up to £30,000.00. NOTE: this cannot include a payment in lieu of any part of your notice period which will be taxable in all circumstances
    • A payment in a discrimination case for injury to feelings (but only relating to events during employment).
    • A payment of legal costs paid direct to YESS.
    • It may be tax effective for your employer to make a payment into your pension as part of the settlement. Take advice on this.
  • The following payments can generally not be made gross and tax will be deducted at source before they are paid to you:
    • Any salary, other earnings or bonus payable during your employment.
    • Accrued holiday pay.
    • Compensation for loss of employment/office of more than £30,000.00 (including for injury to feelings in a discrimination case relating to dismissal).
    • A payment in lieu of notice.
  • Tax indemnity
    The agreement will usually include a tax indemnity which makes you liable to pay any additional tax that arises on the payments made under the Agreement in addition to tax already deducted before the payment is made. It often includes costs, penalties; these should not be payable if attributable to the employer’s default or delay. You should also try to reserve the right to make representations or challenge any liability assessment with HMRC before your employer pays it.

3. PENSION

  • Does the compensation payment adequately reflect any loss of pension?
  • Are pension payments to continue beyond the date of termination?
  • Ensure that you have the necessary documentation and contact details so that you can be directly in touch with the pension fund.

4. SHARE OPTIONS

  • Do you have share options or Long-Term Incentive Plans? You may lose these after your employment ends unless otherwise stated. It may depend on the terms of the scheme so it is worth checking.
  • It may be important that you are recorded as a “good leaver” not somebody who leaves “with cause”. Ask the employer to confirm this.
  • YESS cannot give detailed advice on share options and it is important that, if necessary, you take independent advice.

5. RESTRICTIVE COVENANTS

Do you have restrictive covenants in your contract restricting your ability to work for a competitor after the end of your employment? Check if these will prevent you getting another job. You may be able to negotiate amendments. If the agreement includes new restrictions, make sure you are to receive a token separate payment (this could be anything from £50-500) in return because that payment will be taxable.

6. NON-DEROGATORY COMMENTS (“BAD-MOUTHING”)

There will often be a clause in the Settlement Agreement that you will not “bad mouth” the company or its employees. You can ask for an equivalent clause but most employers will not agree because a company cannot control what its employees say. A common clause is that the employer will use its best endeavours to ensure that there is no “bad mouthing” or, alternatively, that it will instruct its employees only to talk about you in the terms set out in an agreed reference/reason for leaving. These are difficult to enforce.

7. CONFIDENTIALITY

Many employers want you to keep secret not only the sums of money in the Compromise Agreement but also the existence and the circumstances leading up to the Agreement. This may be difficult particularly if people already know about the negotiations. YESS usually suggest that the employee agrees to keep only the terms of the Agreement confidential. If, following negotiation, it is necessary to agree to keep the existence of the Agreement confidential, it should be possible to agree some exceptions. For example:

  • Close family and friends.
  • Future employers.
  • As required by law.
  • Professional advisers.
  • Statutory authorities such as the Inland Revenue and the Job Centre.

It may be advisable not to discuss the settlement with friends or work colleagues because a term may be that nobody knows about the terms of the Agreement.

8. FUTURE CLAIMS

Usually you will have to agree to give up all claims you may have against the company. It is important that the following categories of claim are excluded from this:

  • Claims in respect of personal injury (these may not surface until some time after the Agreement has been signed).
  • Claims in respect of accrued pension rights (again, a claim may not surface for some time).
  • Any claim to enforce the terms of the settlement agreement.
  • Any claim relating to any future employment relationship or victimisation. If you might want to work for the same employer again and are refused because of having made a complaint of discrimination this would be victimisation, from which you should be protected.

9. OUT-PLACEMENT

The employer may pay for out-placement counselling, giving you a number of sessions with a specialist consultant who can assist you with finding alternative work.

10. LEGAL COSTS

Payment of YESS’s costs plus VAT in addition to the settlement sum is valuable as it saves you tax and VAT. Many employers pay an amount, between £350-£750 towards costs. It is worth trying to negotiate an increase on this and it is sometimes possible to negotiate more.

Sometimes employers are prepared to pay the full legal costs rather than paying instead of part of the compensation. If the compensation is more than £30,000.00 this is tax effective.

YESS will normally invoice the employer by issuing you with a bill marked as payable by them, although the principal liability for payment of the bill remains yours. Once the employer has paid YESS’s invoice we will refund you any balance due.

11. REFERENCE

An important part of the Settlement Agreement is often a reference. This can be agreed through a Settlement Agreement. It is not within the power of a Tribunal to order one and therefore can be a valuable reason to enter into a Settlement Agreement. Although some employers routinely only give a reference which states the dates of employment, others will agree to give a personal reference and will agree that the only communication with prospective future employers will be in the terms set out in the reference. It is often a good idea for you to write your own reference as a first draft upon which the employer can then build. It may or may not be that you want to put an agreed reason for leaving in the reference. Think about who should and should not deal with reference requests. If asked for a verbal reference, is your employer also prepared to respond verbally in the same way and in the same spirit as the written reference?

12. BENEFITS

If you are receiving, or may receive, benefits you should take advice on whether these will be affected by your settlement monies.

13. MORTGAGE PROTECTION POLICY

Check the terms of any mortgage protection policy. If the policy will only make payments if you have not left voluntarily it is important for the agreed reason for leaving

to reflect this. However, please do not ask your employer to specify redundancy as the reason for leaving, if that is untrue. This could amount to insurance fraud.

14. COMPANY PROPERTY

Employers usually want to agree a date for returning all company property. If you want to keep your mobile phones or laptop, for example, the agreement should specify what you are allowed to keep and what you must return, when and how to return it.

WHAT NEXT?

We hope you have found this factsheet useful. Please contact us if you have any further queries or you wish to instruct us to advise on your settlement agreement.

Updated 7 March 2019

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The information provided in this document is a brief overview only and is not intended to be a substitute for proper legal advice

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