Employment Settlement Agreements

It is increasingly common for employers to seek to agree mutual termination with employees through settlement agreements. This practice is particularly relevant for senior employees, whose roles and responsibilities often necessitate more complex considerations.

The advantage for employers is that, in return for a payment to an employee, they have the security that they will not face an Employment Tribunal claim from the employee. For senior employees, this can provide a dignified and financially secure exit strategy.

Advantages

To avoid the exploitation of employees, the law requires that in order for a settlement agreement to be valid, the employee receives independent legal advice. This is crucial for senior employees, who may have more at stake in terms of career and reputation.

Legal requirements

When employees, especially senior ones, are asked to sign settlement agreements, common issues to consider are:

• The proposed termination date
  • Does it reflect the employee’s notice entitlement?
  • If it is too far into the future, it may impact on the tax status of the payment.
• The timing of termination payments
  • Does the timescale for payment suit both employer and employee?
  • What impact does timing have on the tax treatment of payments?
• The impact of the agreement on an employee’s ability to find new employment
  • Is the employee to be released from post-termination restrictions?
  • Are obligations for post-termination co-operation too onerous?
• The value of the claims being waived by the employee
  • This will be different from employee to employee as their potential claims will be different, as will the compensation they might be awarded, which in most cases will depend on how quickly they are likely to find another job.
• Reputational issues
  • Employees may want to seek to agree the terms of an agreed reference or announcement to colleagues.
  • Parties may want to prevent each other from making derogatory statements in the future.
  • There is an increased debate about the use of “gagging clauses” that can impact the terms, particularly in certain sectors.
• Continuing benefits
  • Employees sometimes seek to negotiate to continue receiving some benefits after termination, especially where there is no or little cost to an employer. This might relate to issues such as medical or life insurance, or the provision of a company car. Employers will want to ensure there are clear parameters around the provision of these benefits.
  • Some employees ask to retain laptops, or mobile phone handsets or a transfer of their phone number to a personal account. It is important that settlement agreement provisions cover all of the necessary details.
• Bonuses, LTIPS, and share plans
  • Employees who have more complex remuneration structures that might include LTIPs or share plans will want to ensure that their termination provisions are a fair reflection of their entitlements.
• Reaffirmation agreements
  • Some settlement agreements are entered into months in advance of termination and require an employee to re-sign the agreement, or enter into a reaffirmation agreement on the actual termination date. Employers and employees need to ensure that the terms of any such agreements are clear and do not have any unintended consequences.

We are a team of specialist employment lawyers who are experienced in acting on both sides of the fence on settlement agreements, providing tailored advice to both employers and senior employees.