Settlement Agreements

Employment Settlement Agreements are legally binding contracts made between an employee and employer, either during or after employment. These agreements formally confirm the leaving terms between the parties and prohibit the employee from bringing legal action against the employer in respect of the employment and/or its termination. Usually in exchange for a termination payment.

Employment Settlement Agreements offer the benefit of certainty and a clean break between an employee and their employer. An employee will have the security of a termination document setting out what financial settlement they are receiving together with other aspects of termination such as a job reference. The employer, in turn, has the guarantee that it will not have to deal with a future claim by that employee. It is for these reasons that many employers and employees utilise the Settlement Agreement process, even where an employer has followed a fair process and/or the employment has ended amicably.

Settlement Agreements may be offered to avoid a costly and time-consuming, disciplinary or redundancy process or to end a dispute between an employer and employee. Larger companies (e.g. banks) also routinely use Settlement Agreements to ensure their protection against any future disputes or claims after an employee has left the company.

An employee is under no obligation to accept an Employment Settlement Agreement and should only do so once independent legal advice has been obtained; an Agreement cannot be binding unless the employee has received this advice from a specialist Employment Law Solicitor.

If you have been presented with a settlement agreement as a result of your performance being brought into question, and your employer wants to give you the option to leave under agreed terms rather than go through a performance process. You do not have to accept the offer. You can reject it, or request a proper performance process is followed.

Unless you consider the offer is too good to turn down, you should preferably just listen to what your employer has to say at the first meeting- without committing yourself either way and then take immediate legal advice.

Below is an example of some of the clauses which are typically found in the majority of settlement agreements:

Termination Date: This will set out when your employment has ended or will end.

Reason for Termination: This will specify the reason for ending the employment or in some cases will state ‘mutual agreement’.

Compensation: This is likely to be the most important aspect of the Agreement for most employees. Depending on the circumstances of the termination of employment, it is often possible to negotiate the compensation figure upwards, and we will be able to discuss this with you.

Tax indemnity: As compensation can be paid tax-free. A tax indemnity is always given by the employee, which makes you responsible for the payment of any tax and national insurance should HMRC determine that tax should have been deducted.

Notice: Very often, a settlement agreement will provide for a payment in lieu of notice (otherwise known as “PILON’). Such payment is made where you are not working your full notice or being put on garden leave- in other words your employment is being terminated much quicker than would otherwise be the case if you were working out your notice. PILON payments are usually subject to tax and NIC.

Payments up to the Termination Date: This includes your salary, accrued holiday, benefits, bonus and outstanding expenses to be paid up to the termination date.

Bonus or commission, deferred stock options and share awards: The terms of your employment contract will determine whether you are entitled to any outstanding commission, bonuses, shares, stock options or deferred payments under various share schemes. If so, the amounts will need to be stated on the Agreement.

Pension: Payments into your pension should continue up to the date of termination. If a payment is in lieu of notice, your employer is obliged to continue to make contributions for an equivalent period depending on the terms of your contract.

Return of employer’s property: You will usually be required to return company property within a certain timeframe, usually on or before the termination date. Any property you are allowed to retain should be listed in your Agreement.

Waiver of claims: This clause waivers your rights to bring any future claims against your employer. However, it cannot waive your right to claim for any personal injury which you were not aware of at the date of signing of the agreement. You can also not waive your right to accrued pension rights, or to enforce the actual terms of the Agreement itself.

Reference: An employer is under no obligation to provide you with a job reference and most will only provide a factual reference which sets out dates of employment and the employee’s job title. However it is possible to negotiate a more personal reference which should be attached to the Agreement.

Confidentiality: This clause is commonly used to prevent you from discussing the terms of the settlement agreement and the circumstances surrounding it.