Settlement Agreements – Frequently Asked Questions
- Ex gratia payment/Termination payment
- Notice pay
- Accrued holiday leave
- Garden leave
- Post-termination restrictions
- Share options
- Company property
- Reasons for leaving
- There is no legal obligation on an employer to provide a reference for an employee
- It can be included as a useful addition from an employee’s perspective
- It is agreed and negotiated with your employer
- May be a factual reference, or a more detailed ‘glowing’ reference which sets out achievements and role in more detail
- Some employers only allow a factual reference to be included in the agreement in line with company policy
Ex gratia payment/Termination payment
If a lump sum is payable to you as compensation in the settlement agreement, the wording of the agreement should state whether it is taxable or tax-free.
Usually sums under £30,000 are tax free, but this is dependant on the wording in the settlement agreement. This can be explicitly referred to as tax free or alternatively it may be made clear in a different clause.
Notice pay varies from individual to individual depending on your contractual notice pay entitlement or your statutory entitlement. The amount of notice pay stated in the settlement agreement will also depend on whether you have worked through your notice period or whether you are receiving payment in lieu of notice (PILON).
This latter option is only available where the provision for a PILON is present in your contract of employment. Notice pay in a settlement agreement is normally subject to tax and national insurance contributions.
Accrued holiday leave
Any holiday leave which you are entitled to should be included as part of your compensation in the settlement agreement. Usually this is calculated to the nearest half a day or full day.
This is subject to tax and national insurance contributions as it is classed as salary.
As part of the settlement agreement you may be placed on garden leave for a short period of time. This will prevent you from obtaining another job until the time period has elapsed, unless this has been agreed in advance of the garden leave.
In this time period, you should still be entitled to the same protection as if you were an employee. There is often a “release of claims” document that must be signed at the end of this time period to waive your employment law rights. This will also have to be signed following independent legal advice.
Generally, the validity of post-termination restrictions depends upon their construction and whether they are reasonable. This will vary depending on the restriction(s) imposed in your contract of employment.
We can negotiate with your employer to try and waive these post-termination restrictions. Alternatively, you may receive additional compensation for compliance with the restrictions.
As part of your contract of employment you may be entitled to numerous benefits such as health insurance or a company car. In some circumstances it is possible to negotiate for these benefits to continue for a short period of time following the settlement agreement.
For example, it may be possible to negotiate and extend your health insurance benefit for a period of 3 months following the termination date.
Your entitlement to a bonus as part of your settlement agreement will depend on whether the bonus is contractual or discretionary. It will also depend on numerous other factors, such as whether your bonus is payable before the termination date in your contract of employment, and whether the company have reasonable exercised their discretion in refusing to pay the bonus.
Your entitlement to share options will depend on the share policy and whether the shares are currently vested or unvested.
It will also depend on the nature of your exit from the company and whether you are classed as a “good leaver” or “bad leaver” under the share plan. As the labels suggest, a bad leaver may be unable to claim their entitlement to share options. We can review share plans and negotiate your entitlement to share options.
There can be a clause in the settlement agreement to ensure company property is dealt with as per the company’s wishes.
This can include deleting confidential information or returning property such as a company phone, car or laptop. The company will often require evidence that this clause has been complied with.
This clause is mainly for the employers benefit as they do not want you to discuss the contents of your settlement agreement with anyone in order to protect the reputation of the company.
This confidentiality requirement should also be complied with by your employer to protect your interests. There are usually some exceptions to this which will allow you to discuss your settlement agreement with your independent legal advisor or close family members. These exceptions may also include future employers and other professional advisers.
Reasons for leaving
As the employer is usually tasked with drafting the settlement agreement they may outline your reason for leaving as something you disagree with. For example, it could state poor performance or misconduct.
As part of negotiating a settlement agreement, we can ask for this to be amended as per your wishes. However, this should not impact you tremendously as the agreement is confidential and this clause will be too.
Disclaimer: The above information should not be taken as legal advice. For legal advice on employment law matters please contact a member of our team directly.