Settlement Agreements

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1 We re Leigh Day and we believe everyone has the right to justice and for their voice to be heard Settlement Agreements Practical tips and points to consider when negotiating terms Top claimant firm Leigh Day is extremely impressive, and one of the best in its area. Legal Top Employment team The Laywer Awards and Legal Business Awards.

2 Table of contents Introduction The termination date The payments to be made Tax Tax indemnity Pension Shareholders and share options Restrictive covenants Bad-mouthing Confidentiality Warranty that you are not in negotiations about another job Future claims Out-placement Legal costs Reference Benefits Mortgage Protection Policy Claims against you 13 Meet the team 14 2

3 Introduction This brief guide sets out below a list of the more common issues when negotiating the Settlement Agreement. One of the key legal effect of a Settlement Agreement (previously called a Compromise Agreement ) is that you give up your right to pursue or bring proceedings against your employer in return for a payment and/or other benefit. The Agreement is legally binding so long as it is signed both by you and your former employer and you receive advice on the terms and their effect by a solicitor or relevant adviser. It is Leigh Day s job to explain the contents of the Agreement to you to ensure that you understand it and its effect. Please note that it is your responsibility to check the final version of the Agreement to make sure you are willing to agree to all the terms including the compensation to be paid. Once the Agreement has been signed, it cannot be changed and you will have no further claim against your employer. Thus, the final version should be read carefully and in full. Publication Date: May Author: Emma Satyamurti and Elizabeth George. 3

4 1. The termination date 1.1 What is the date that you agree your employment will (or did) end? Unless otherwise stated your salary and other benefits under your contract of employment will end on this date If a Settlement Agreement is completed before the Termination Date you may be required to sign a second Settlement Agreement. The second Agreement will confirm that you are waiving your rights to bring any legal claim relating to the period up to the Termination Date. 2. The payments to be made 2.1 By what date is the payment to be made and how? 2.2 Do the payments include: a. Outstanding salary b. Outstanding holiday c. Outstanding car allowance d. Any other outstanding payments to be made such as expenses e. Notice pay f. Compensation g. You may have accrued a bonus but sometimes this is only payable if you are still employed on a date in the future so you will lose it unless you negotiate to be paid it under the agreement. 4

5 2. The payments to be made cont If you are claiming statutory maternity pay it is advisable to include a provision in the agreement that any remaining amount is paid as one lump sum, or the agreement should provide that you can enforce payment of SMP. 2.4 What will happen to benefits in kind such as: h. Retention of the company car i. Continuation of health and any other insurance such as life insurance; sometimes you can negotiate a continuation of health insurance beyond the termination date, depending on the scheme. j. Professional memberships (ensure that any practising certificate is returned. Are they going to charge pro rata in respect of any professional subscriptions which continue to the end of the year?) 2.5 Are any deductions to be made? a. Are they going to require you to repay a travel loan or part of it? b. Have you taken more holiday than you are entitled to pro rata? c. Are they going to require repayment of any maternity pay which has been received but which is subject to repayment if you leave employment? d. Tax and national insurance will usually be deducted from any notice pay due. Tax is deducted from most payments over the 30,000 tax free amount which can be given to employees on the termination of employment. 5

6 3. Tax It is important that the payment to be made is tax efficient. Leigh Day is not in a position to give detailed tax advice. If in doubt you should consult either an accountant or a tax lawyer. 3.2 As a general rule, with some exceptions, the following payments can be made gross, without deduction of tax; they should be separately identified in the agreement: a. An agreed sum which is for compensation for loss of employment/office up to 30,000. This only applies to employees and officers not, for example, to equity partners or those who are self-employed; b. Compensation for losses resulting from discrimination during recruitment or employment (with the exception of back pay). Tax is paid on termination of employment subject to the 30,000 exclusion c. A payment on account of the individual s disability; d. A payment in a discrimination case for injury to feelings where this arises out of pre-termination conduct. If the injury to feelings arises out of the termination it is likely to be taxable; e. Compensation for personal injury caused by discrimination is not usually taxable; f. A payment of legal costs provided it is paid directly to your solicitor (although VAT must be paid) and relates to the termination of employment; g. It may be tax efficient for your employer to make a payment into a pension so it is worth taking advice on this. 3.3 The following payments will generally be paid net so tax and national insurance will be deducted at source before they are paid to you: a. Any salary or other earnings due up to the date that your employment ends. This would include compensation for a discretionary performance-related bonus; b. Holiday pay accrued up to the day your employment ends; c. A payment in lieu of notice where there is a provision in your contract that a lump sum payment can be made in lieu of notice (this provision does not exist 6

7 3. Tax cont... in all contracts) or where it is the employer s normal custom and practice to make payments in lieu; d. Consideration for restrictive covenants. 3.4 Tax, not national insurance, will usually be deducted from a termination payment over 30, Tax indemnity 4.1 Are you required to give a tax indemnity? a. The employer usually wants you to sign an indemnity saying that you will be 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. b. If the Agreement provides that interests, costs, penalties are also payable you can ask that this does not apply if these are payable as a result of the employer s default. c. The employer should agree to inform you if HMRC consider that more tax is payable so that you have an opportunity to comment. 5. Pension Points to consider include: a. Are pension payments to continue beyond the date of termination? Sometimes you can negotiate this but it depends on the terms of the scheme. b. Do you have the information you need about your existing pension entitlements? Ensure that you have the necessary documentation and contact details so that you can be directly in touch with the pension fund. c. Does the compensation payment adequately reflect any loss of pension? 7

8 6. Shareholders & share options Points to consider include: a. If you are a shareholder check your share agreement, for example, you may be required to sell back your shares on the termination of your employment. Options may need to be exercised before the end of the employment; b. How are share options going to be dealt with? c. Sometimes it is important in relation to a share option scheme that you are recorded as a good leaver as opposed to somebody who leaves with cause. Ask the employer to confirm this and to record you as a good leaver in the agreement if necessary. 7. Restrictive covenants You should check your employment contract to see if there are any restrictive covenants which restrict your ability to work for a competitor for a period of time following termination of employment. If there are any such restrictive covenants in the contract of employment you may want to negotiate that they are either withdrawn or that they will be enforced only in particular circumstances, in which case this should be reflected in the Settlement Agreement. Sometimes new restrictions are imposed as a condition of receiving the compensation. 8

9 8. Bad-mouthing The employer will normally require you to agree to a clause in the Settlement Agreement that says that you will not bad mouth or make derogatory comments about the company. You can ask for something equivalent in return. Some employers are not prepared to agree to this because a company cannot guarntee not to bad mouth an individual, as it does not have sufficient control over all of its employees. One way of dealing with this is to say that the employer will use its best or reasonable 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. However, these clauses are very difficult to enforce. 9. Confidentiality Many employers want you to keep secret not only the sums of money and other terms in the Settlement Agreement but also the existence and the circumstances leading up to the Agreement. This is often very difficult to do particularly if a lot of people know about the negotiations already. You also need to be able to tell a future employer why you left. We 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: a. Close family and friends b. Future employers c. As required by law d. Professional advisers e. Your Trade Union f. Statutory authorities such as HMRC and the Job Centre It is best not to discuss the settlement or the discussions you are having with your employer with friends, and in particular with work colleagues, at any stage, because you may be asked to warrant that you have not previously discussed the terms of the Agreement with anyone. 9

10 10. Offers of other employment You may also be asked to warrant that you have not been offered another job and/or you are not expecting to be offered another job as at the date of signing the agreement. 11. Future claims It is common for an employer to ask you to agree to give up all claims you may have against the company. The following categories of claim should be excluded from this: a. Claims in respect of unknown personal injuries (these may not surface until some time after the Agreement has been signed); personal injury known at the time of the Agreement or related to a discrimination claim will not be excluded; b. Claims in respect of accrued pension rights (again, a claim may not surface for some time); c. Claims other than claims arising out of your employment or its termination; d. Claims to enforce the agreement; It may also be possible to exclude the following although many employers will not agree to this: e. Any claim relating to any future employment relationship. For example through applying for a job or through a takeover/transfer of undertaking the employer may either employ or have the opportunity to employ you in the future. If they decide not to employ you or to dismiss you because of the trouble that you have caused in the past, this could be unlawful victimisation under the discrimination legislation and you should be entitled to bring a claim; f. Any claim for victimisation e.g. following the provision of a bad reference; g. Claims arising after the date of the Agreement. However, since the idea of the Agreement is to achieve a clean break most employers will not agree to this. 10

11 12. Out-placement In addition to payment of compensation the employer may be prepared to pay for outplacement counselling. This is often very valuable and you will be entitled to a number of sessions with a specialist consultant who can assist you with finding alternative work. 13. Legal costs 13.1 Who is paying your legal costs? a. Payment of Leigh Day s costs plus VAT in addition to the settlement sum can obviously make the Settlement Agreement far more valuable to you. Many employers pay only plus VAT towards costs which is unlikely to cover all the legal costs. It is worth trying to negotiate an increase on this and it is sometimes possible to negotiate up to 1,000 plus VAT or more. Sometimes employers are prepared to pay the full legal costs rather than paying quite as much compensation and if the compensation is more than 30,000 this could be a tax efficient thing to do. b. Leigh Day 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. If the employer pays your costs in full, we will issue a credit note in respect of all or part of any payment you have already made on account of your costs and will refund you any balance due. c. Because our costs can run up quite quickly, sometimes it is necessary to take a pragmatic view about a particular clause which, whilst not being ideal, may be acceptable. The alternative may be that the bill for legal costs becomes disproportionate to the amount of money being paid by your employer under the Agreement. 11

12 14. Reference An important part of the Settlement Agreement is a reference. Whilst it is not within the power of a Tribunal to order one, this can be agreed through 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 Agreement or in no less favourable terms. 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. However, if the employer s standard practice is to provide only date of employment and job title, and this is known in the industry, it may look suspicious if you agree a glowing reference because the employer may suspect this is provided as part of a settlement agreement. 15. Benefits We cannot advise you on benefits but you should consider the impact of any settlement on your ability to claim benefits. For example, if you have left your job voluntarily you may not be able to claim certain benefits. It may be worth checking with the Department for Work and Pensions before you agree a reason for leaving with your employer. If you are being made redundant the Agreement should make this clear. Please note that any means tested benefits (benefits that are payable if the household income is below a certain level) are generally restricted if an individual s savings are too high. Again, you should check with the Department for Work and Pensions for details ( 12

13 16. Mortgage Protection Policy It is important to check the terms of any mortgage protection policy. Policies often only make payments if you have not left voluntarily. If this is the case the Agreement should reflect this. 17. Claims against you If you think that your employer may have a claim against you then we can negotiate for a clause in the Agreement saying that it compromises claims against you as well as claims by you. 13

14 For further information Elizabeth George Barrister Elizabeth George is a barrister who specialises in all aspects of employment law and discrimination. She has a wealth of experience in advising and acting for employees in employment tribunals and the civil courts, as well as providing support and training for various NGO s and campaign bodies. Emma Satyamurti Solicitor esatyamurti@leighday.co.uk Emma Satyamurti is an experienced employment lawyer and litigator. She advises and represents claimants in a wide range of employment claims including discrimination, dismissal, TUPE, whistleblowing and redundancy. She has a particular interest in disability discrimination. Follow Emma on Nigel Mackay Solicitor nmackay@leighday.co.uk Nigel s clients come from financial services, media, real estate, hospitality and the public sector. Nigel advises employees on all areas of employment law, including discrimination claims, unfair dismissal and redundancies, whistleblowing. Follow Nigel on Jasmine Patel Solicitor jpatel@leighday.co.uk Jasmine is a solicitor working in the firm s employment and discrimination team. She has experience working on maternity and pregnancy discrimination, disability discrimination, sex and race discrimination, unfair dismissal, victimisation and whistleblowing. She is experienced in all stages of litigation from commencement to settlement and she has settled cases for substantial compensation. Follow Jasmine on Nick Webster Solicitor nwebster@leighday.co.uk Nick has experience in working on maternity and pregnancy discrimination, disability discrimination, sex discrimination and race discrimination, unfair dismissal, restructuring, internal dispute resolution, victimisation and whistleblowing. He is experienced in all stages of litigation from commencement to settlement. Nick regularly advises on compromise agreements. Follow Nick on Rachel Irwin Solicitor rirwin@leighday.co.uk Rachel is based in the human rights department and in addition to undertaking a substantial amount of employment and discrimination work she also has experience of actions under the Human Rights Act and judicial review. Rachel s work was instrumental in the successful age discrimination case brought by Miriam O Reilly against the BBC in Keep on top of employment law updates by 14

15 Leigh Day, Priory House, 25 St John s Lane, London EC1M 4LB T F E employment@leighday.co.uk Follow us on Twitter twitter.com/leighdayemploy Information was correct at the time of publication