Settlement Agreements (previously known as Compromise Agreements) are used by employers to terminate the employment of an employee, usually in exchange for compensation and often as a way to resolve a dispute. By law, employees must receive advice on the terms and implications of signing a Settlement Agreement. We advise employees on Settlement Agreements, and also employers on when to offer them. We’ll also help with the negotiation of the terms of the Agreement.
If your employer has offered you a Settlement Agreement, there are several important issues to consider. Our top ten tips below should help you work out your priorities before going to see a lawyer. For a no obligation discussion on your Settlement Agreement, please call 0131 226 8200 or email firstname.lastname@example.org.
- Redundancy Pay
If you are being made redundant the minimum your employer has to pay you is statutory redundancy pay, if you are entitled to it, and notice pay (unless you’re working out your notice period). You can calculate your statutory redundancy pay here. Even if you’re not being made redundant, any compensation paid to you up to £30,000 can usually be paid free of tax.
- Tax Efficiency
Any payment made to you by the employer should be structured in the most tax-efficient way for you, within the boundaries of the law. Generally speaking, compensation for unfair dismissal, redundancy or for unlawful discrimination should be paid free of tax.
- The Termination Date and Garden Leave
Generally, you and your employer should be able to agree on the date that your employment will terminate. Some employers will choose to have an early termination date and pay you in lieu of your notice period rather than have you working it. If your employer chooses to delay the termination of your employment until the end or your notice period, they may put you on garden leave (paid suspension) rather than have you coming into the workplace. To some extent, all of these issues are negotiable with the employer.
- Post-termination Restrictions
Some Settlement Agreements will contain provisions to try to stop you working for a competitor of your employer or working with their clients or suppliers or these will be in your Contract of Employment. If you plan to get a new job in the same sector or to set up business on your own, you need to get clear advice on your right to make a living and see if you can re-negotiate any restriction that is too onerous.
- Shares and Share Options
If you hold shares and/or share options in the company, you’re leaving it’s important to know whether or not you’ll be treated as a Good Leaver, allowing you to continue to get the benefit of them. It’s useful to know the terms of any Shareholder Agreement or Share Option Scheme that you may be party to before seeing a lawyer as any right you have in this regard should be referred to in the Settlement Agreement.
If you are a director of the company you’re leaving, you’ll probably have to resign though you may be able to stay on as a non-executive director or a consultant, depending on the circumstances. The Settlement Agreement should cover this situation. You should also consider whether you have any on-going liability for the company by virtue of having been a director (e.g. warranties or personal guarantees granted).
- IP and Confidentiality
If you have developed intellectual property (e.g. a piece of software or copyright material) or hold confidential information which relates to your employer’s business, your employer may want to claim it as their property and insist you give up any right to it. Depending on the circumstances, it may belong to you – ensure you take advice if this is relevant to you.
- Reference and Announcement
If you plan to find a new job after your employment ends, make sure you know the terms of the reference your former employer will send to prospective employers. The terms of the reference can be agreed in advance and set out in the Settlement Agreement, to give you peace of mind. You may also be able to agree with your employer the wording of any announcement made to your colleagues about your departure.
- Pensions and Medical/Life Insurance
If you are a member of the employer’s pension scheme, it is highly likely that the employer’s contributions to the scheme will stop when your employment terminates. Make sure your employer puts you in touch with the scheme administrators so that they can advise on your options for the pension. If you’ve got life or medical insurance through your employer, it will probably come to an end when your employment terminates. You may want to ensure that you arrange alternative cover.
- Legal Fees
It’s standard practice for employers to make a contribution to the legal fees incurred by an employee in taking advice on a Settlement Agreement (which you must do to make the Agreement legally binding). The level of the contribution will vary depending on the complexity of the matter and the general circumstances, and we can advise you on an appropriate amount to request.
The information above is for guidance only and is not intended to replace specialist legal advice.
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