Ten key clauses in a settlement agreement – a guide for employees
In this article Chris Hadrill, the partner in the employment department gives the benefit of his experience on the top ten clauses (in no particular order) for employees in settlement agreements
- The date and reason for the termination of your employment
- How your notice period is dealt with
- The ‘ex-gratia’ value of the settlement agreement
- The tax indemnity clause
- The reference that you’re being provided with
- Internal/external announcements that are being made
- Payment of your legal fees
- The confidentiality clauses
- The ‘non-derogatory’ clauses
- The ‘reasonable assistance’ clause
1. The date and reason for the termination of your employment
The reason for the termination
The reason for the termination of your employment is one of the crucial pieces of information relating to the advice on and negotiation of your settlement agreement – what the reason for the termination is will alter the advice given to you and change the negotiation strategy for your settlement agreement.
If your employer hasn’t given you a reason for terminating your employment/offering you a settlement agreement then this should be a point that you should follow up on (if your employer has already terminated your employment then you may wish to send a formal written request for reasons for your dismissal to your employer).
The date of termination
The date of termination of your employment will also be an important issue in the settlement negotiations, for a number of reasons: among other reasons, it will determine the date that you leave your employer and it will determine the date that you are paid salary and benefits to.
2. How your notice period is dealt with
Check your contract of employment/service agreement to determine what period of notice you are entitled to.
There are a number of different ways that your notice period can be dealt with under a settlement agreement:
- You may be asked to serve your notice period out (i.e. to work it);
- You may be placed on ‘garden leave’ (i.e. to remain at the company for your period of notice but (generally) not do any work on such)
- You may be asked for your employment to terminate immediately and that your notice period be paid ‘in lieu’ for the value of your notice period
These options can sometimes be dealt with in combination (e.g. you could work a part of your notice period and be paid in lieu for the rest of it).
The settlement proposal, or settlement agreement, that you have been given will normally specify how your notice period will be dealt with.
3. The ‘ex-gratia’ value of the settlement agreement
An ex gratia payment is a payment made by an employer where there is no contractual obligation to do so – it is derived from the Latin: “out of kindness” (used to mean done as a favor and without legal obligation).
Payments that are made between an employer and employee are normally subject to tax as they will be described as ‘arising out of the contract of employment’ by HMRC. Ex-gratia payments are an exception to that rule and fall under a tax exemption from s.403 Income Tax (Earnings and Pensions) Act 2003 for any amounts under £30,000.00. This is because the payments made are not made for the work that has been undertaken or for a provision of services; they are a “voluntary” payment made by the employer and are “compensation for loss of employment”.
4. The tax indemnity clause
A ‘tax indemnity clause’ is a clause which sets out you and your employer’s obligations if there is a subsequent tax demand by HMRC (or any other competent taxation body).
This clause will normally detail: what will happen if there is a tax demand by HMRC; who will be responsible to pay any interest, penalties, costs, and expenses if there is a tax demand; where the employee has to indemnify the employer against any interest, penalties, costs, and expenses; when the employer should notify the employee of a tax demand; and what documents the employee is entitled to demand from the employer if and when a tax demand is made.
It will normally be necessary to amend a settlement agreement to make the tax indemnity clause a little more ’employee friendly’.
5. The reference that you’re being provided with
One of the issues that employees are (quite rightly) concerned about is whether they’re going to get a ‘good reference’ from their employer. Some employers will give ‘good’ (positive) references; most employers will normally give a ‘standard factual’ reference – this is essentially a ‘neutral’ reference detailing the dates that the employee worked for and the position that they most recently worked in.
If you wish to negotiate a ‘good’ reference with your employer then it’s a good idea to address this at the beginning of the negotiations.
6. Internal/external announcements that are being made
If you’re in a senior position or a client-facing position then it’s normally a good idea to agree an internal/external communication that will be sent to colleagues, clients, suppliers etc. upon signature of the settlement agreement or upon termination of employment (whichever is applicable in the circumstances).
7. Payment of your legal fees
Your employer, by virtue of established custom and practice, will normally pay a contribution towards your legal fees for the advice on the settlement agreement – this contribution is normally somewhere between £350 plus VAT and £750 plus VAT, but can be in the thousands of pounds for senior executives leaving their employment.
8. The confidentiality clauses
Confidentiality will, of course, normally be of paramount important to the parties to a settlement agreement – the employer will want the employee to keep the terms and reasons for the agreement (and sometimes even the existence of the agreement) confidential, and the employee in turn will quite often want to make sure that the employer’s ability to say what it likes about the existence, terms or reasons for the agreement is circumscribed. It will therefore normally be necessary to make sure that the confidentiality clause properly protects the employee, as well as the employer.
9. The ‘non-derogatory’ clauses
There will normally (but not always) be a clause in a settlement agreement confirming that the parties to the settlement agreement must not make ‘derogatory’ comments, whether verbally or in writing, about the other after the settlement agreement is signed. This is important to get right, and is particularly the case where the employee and/or the employer are high-profile in nature and will want to preserve their respective reputations.
10. The ‘reasonable assistance’ clause
The ‘reasonable assistance’ clause is normally included in settlement agreements: this is a clause which states that the employee must provide ‘reasonable assistance’ to an employer if, for example, a third party makes a claim against the employer – this will normally compel the employee to, for example, provide a witness statement upon request and/or attend court to give evidence.
Please note that which clauses may be important in your specific circumstance will depend upon your priorities and the individual situation – it is strongly suggested that you obtain legal advice on your particular matter.