Settlement Agreements

What to expect when you receive a Settlement Agreement

As a result of the developing economic issues, employers are continuing to consider and implement various measures to help with business stability, growth and survival. These measures can include cost cutting, which is resulting in many businesses re-structuring and reducing staffing levels by way of both voluntary and compulsory redundancies.

We are currently seeing site closures, site moves and hybrid working. Some of which is resulting in early retirement, voluntary redundancy, relocation and redeployment, which often is done by way of a Settlement Agreement.

Most recently, we have seen that Vauxhall has announced plans to close its van-making factory in Luton, initially putting about 1,100 jobs at risk. Which will ultimately lead to redundancies within the organisation.

What is a Settlement Agreement?

A Settlement Agreement is a legal contract between an employer and employee that outlines the terms and conditions under which an employment relationship will end. Typically, employers offer Settlement Agreements, which include financial compensation to an employee who has made, or could make claims against them. Entering into a Settlement Agreement provides a clean break for both parties.

For a Settlement Agreement to be legally valid and binding, you will need to take legal advice on the terms and effects of it before signing. Once this is done then the independent legal adviser will provide an Adviser’s Certificate confirming so.

Most employers provide a fee contribution to an employee's legal fees in connection with reviewing the terms and effects of the Settlement Agreement. If your employer hasn’t already offered one, then it is worth asking your employer for a contribution to your legal fees.

Enhancing terms of settlement offer

If you are not happy with the terms of the Settlement Agreement, you can look to enhance the terms of the offer.

If you would like further support on this, we can contact your employer directly on your behalf and assist with negotiations so that we can get you the best deal possible. This would incur additional costs beyond your employer’s legal contribution, and we can discuss this with you further if you would like additional support.

What terms should you expect the Settlement Agreement to include?

For your initial guidance, we have included a few of the terms which we would expect within a Settlement Agreement. We recommend using this as a guide before having a meeting to discuss the terms and effects of the Settlement Agreement with us.

Terms in the Settlement Agreement	What does it mean?	What you should look out for?
Financial compensation	The financial terms of the Settlement Agreement may include many elements, for example: • A Termination Payment for compensation for the loss of your employment. If the loss of employment is related to redundancy, then this figure may include the statutory redundancy payment that you are entitled to. This may also be referred to as an ex-gratia payment. • Payment in respect of your salary up to the termination date. • Payment in lieu of notice (PILON). • Restrictive covenant payments. • Payment for a bonus, share options or commission.	The different elements must be dealt with separately, as each could be treated differently for income tax and national insurance contributions. In general, the Termination Payment provided to you "directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of their employment", can be paid free from national insurance contributions. It will only be subject to income tax to the extent that the amount exceeds £30,000. Please see our article on Employment Guide to Termination Payments for further detail on this HERE
Termination date	This will be your final day of employment and the date on which you cease to be an employee of the company.	If the termination date is set for a date in the future, your employer may require you to sign a reaffirmation. In other cases, it may be that your termination date has already passed when you are signing the Settlement Agreement.
Tax indemnity	The Settlement Agreement will include that the first £30,000 of the Termination Payment can be paid free from national insurance and income tax. The Agreement will also include a tax indemnity that if any tax issues were to arise and it was deemed that tax should have been due, that you would be liable for the payment of tax on the Termination Payment to HMRC.	It is important that the financial compensation elements of the Settlement Agreement are clearly set out and the appropriate payment of tax is made to ensure that the Termination Payment can be paid free from national insurance and income tax.
Non-Disparagement Clause	Confirmation that you will not make any derogatory comments about your employer and their employees after the termination of your employment.	Consider whether this is a mutual clause, and your employer will not authorise derogatory comments to be made about you.
Benefits, including pension contributions and private medical insurance	Following the Termination Date, the benefits which you receive as part of your employment package will end. It may be that your employer allows you to retain certain benefits after your Termination Date. For example, if your employer would be willing to continue your private medical health insurance until the expiry date of the policy. Alternatively, it may be the case that you could ask your employer to transfer the private medical health insurance into a personal plan.
Confidentiality	Your Agreement will include wording of a continuing obligation to keep the terms, existence, and discussions leading up to the Agreement being offered confidential.	There will be exceptions, such as speaking to legal advisers, medical advisers, and your partner or immediate family members. On the whole, however, the Agreement will state that you need to keep it confidential.
Claims waiver	Your Agreement will list the claims that are being settled and/or you are waiving the rights to bring a potential claim for anything that may have occurred during your employment or leading up to the termination of your employment.	There are a few exceptions to the claims being waived as part of the Settlement Agreement, including: • Claim to enforce the terms of the agreement • Claim in respect of accrued pension rights • Claim for personal injury, which you are not aware of at the time of signing the agreement.
Return of company property	The Settlement Agreement will include that you will be required to return any company property in your possession.	You should consider whether it will be possible for you to return the company property by the date specified in the agreement. Consider whether you can ask for the return to be arranged through a courier and ensure this is stated within the Settlement Agreement. You could also consider as part of negotiations to ask your employer to keep certain company equipment as part of your settlement with them.
Breach of terms of the Settlement Agreement	The Settlement Agreement may include conditions for the repayment of funds received if the terms of the Settlement Agreement are breached.	Consider the specific terms of your Settlement Agreement and ensure you have a clear understanding of all clauses and conditions to which you are agreeing.
Agreed reference	This could include a standard factual reference that your employer will provide, or it could be a more detailed reference.
Post-termination restrictions/restrictive covenants	These are often set out within your Contract of Employment and will continue to be enforceable for a period after the termination date, which depend on the wording of your Contract of Employment. These restrictions could include: • A non-compete prohibiting you from working for a competitor or starting a competing business for a specified period after the termination date. • A non-solicitation clause prohibiting you from taking your former employer's clients, customers, or employees. • A non-poaching clause prohibiting you from seeking to hire or persuade other employees to leave the company.	Your Contract of Employment will state how long any restrictive covenant remains enforceable after your termination date. While Government guidance suggests that non-compete should be limited to 3 months, we can advise further on this depending on your position and the wording included within your Contract of Employment.
What does a reaffirmation mean?	Where a Settlement Agreement has been proposed with a gap between signing the agreement and the Termination Date, an employer may require an employee to sign a reaffirmation.	This is a further waiver of any potential claims that you may have against your employer, and so provides your employer with additional protection from any potential legal action against them.
What is the legal costs contribution?	An employer will usually pay a contribution towards your legal fees associated with reviewing the terms and effects of the Settlement Agreement.	The contribution towards legal fees, however, will not cover further assistance, such as with negotiating the terms of the offer.

How we can help

Irrespective of the circumstances and the reason for which you have been offered a Settlement Agreement, we would be happy to assist you via telephone, Teams or in-person at our offices.

Get in touch with our expert team for us to provide guidance on the contents of your Settlement Agreement and explain the legal consequences of signing it.