19th December 2016

Settlement agreements are used as a means of a “clean break “and brings an employment relationship to an end in a mutually agreed way. It is unfortunate that in some circumstances an employer and employee may feel that their employment relationship is no longer working and a ‘clean break’ is the best way forward. In these situations both parties can agree the basis for terminating the employment relationship.

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The agreement states that it is ‘subject to contract’.  This statement indicates that it is the intention that the agreement will not be binding until signed.

Without prejudice is a common law principle which prevents statements, whether written or oral, which are made in a genuine attempt to settle an ‘existing dispute’, from being brought before an employment tribunal or other court as evidence in legal proceedings between those parties about that dispute.

 This means that the draft agreement cannot be used in evidence in subsequent court or tribunal proceedings (except in limited circumstances).

Designation Clause

Before Clause 1, you should insert the names of the parties, i.e employer and employee. Once the agreement has been reached on the terms of the settlement agreement, you should insert the date that the agreement is signed by the parties. If the agreement is signed by each party on different dates then you should insert the later of the signing dates.

Clause 1: Background

This clause sets out that the parties are entering into a settlement agreement and that in doing so the employer does not admit any liability. You should enter the employee’s job title and employment start date.

Clause 2: Definitions

This clause sets out the definitions of the terms used in the agreement. We have to keep consulting this clause for emphasis on phrases contained within the agreement.

Clause 3: Termination Period and Notice

Clause 3.1

The ‘Termination Date’ is the date the employer and employee are agreeing to end the employment relationship.

Clause 3.2

This clause will stipulate the wages/salary payments that the employee is entitled to receive during the notice period. This will normally be determined by the contract of employment and will be subject to the normal rules on taxation of employment income. Any holiday entitlement, contractual or non-contractual that the employee will have accrued but not taken at the agreed termination date should be calculated and the number of these outstanding days inserted in the agreement.

Payments under the clause does not constitute part of the agreed ‘Settlement Payment.’  

Clause 4: Waiver

 In reaching a settlement agreement the employee agrees to settle particular claims, ie agrees not to pursue specified claims which they have already presented, or which they may potentially present, to an employment tribunal or court.

This clause acknowledges that the agreement is made in full and final settlement of those ‘specified claims.’ It also sets out that the employee agrees to withdraw any claims that have already been brought. To be legally valid in waiving an individual’s right to bring a complaint before an employment tribunal or other court, a settlement agreement has to specifically state the claims that it is intended to cover. These can be actual claims that have already been brought, or potential claims not yet brought but which can be reasonably anticipated at the time the agreement is reached. However, simply saying that the agreement is in ‘full and final settlement of all claims’ will not be sufficient to waive an individual’s right to bring or continue employment tribunal or court claims.

The settlement agreement must therefore properly specify the particular claims which the parties are agreeing to settle.

Clause 5:  Settlement Payment

Clause 5.1

This clause sets out the amount of money the employer agrees to pay to settle the claims that the employee has agreed not to take to, or to pursue further at, an employment tribunal or court. This sum is referred to as ‘the Settlement Payment’.

Clause 5.2

This sets out the tax liabilities that the parties expect to attach to the Settlement Payment. In certain circumstances, payments of up to £30,000 of a Settlement Payment (or the first £30,000 of larger Settlement Payments) may be paid free of tax and NI. However, the taxation of settlement payments can be complex, and parties in any doubt should consult a tax adviser or HMRC. If the reason for the employee’s employment coming to an end is redundancy, it is prudent to state the amount which is paid as redundancy payment. Whereas statutory redundancy payments will not be subject to income tax and National Insurance, but a contractually enhanced redundancy payment might be.

Clause 6 Conditions Regulating Settlement Agreements

 There are a number of legal conditions that must be met in order for a settlement agreement to be valid in waiving an individual’s right to bring a complaint or complaints before an employment tribunal or other court. A valid settlement agreement must provide a list of the legislative provisions in which these legal conditions are set out.

Clause 7 Employer’s Property and Employee’s Property

In some cases the employee will be in possession of property or information which is owned by the company (for example, a laptop, mobile phone, confidential records, etc.).It is prudent to include this clause which specifies that, and when, the property will be returned or information deleted permanently. If an employee has been using a personal mobile phone for work calls, it would be prudent to ask the employee to change their mobile number.

 Clause 8: Confidentiality Clause 8.1

The confidentiality clauses and/or restrictive covenants in their employment contract should remain binding even after the termination of the employment relationship. Where no such provisions are contained in the employment contract then Clause 8.1 should be deleted.

Clause 8.2

This relates to situations where the parties agree to keep the settlement agreement itself confidential. This does not unduly restrict an employee from talking about the reason for departure with your solicitor, your spouse, or in a public-interest disclosure.

Clause 8.3: Non Disparagement

 The employee agrees that they will not make any derogatory statements, extending to statements made on social media and the publishing of articles.

Clause 9: Employee’s Representations and Warranties

This clause sets out an undertaking by the employee about their conduct during the employment relationship. If it transpires that the employee was not truthful in relation to the undertaking in then the employer may be able to withhold or recover the Settlement Payment and/or potentially sue the employee for any relevant losses or damages.

Clause 10: Employee’s Advice and Costs

 It is a legal requirement that the agreement records that the employee has received advice from a relevant independent adviser. An employer may, if he or she wishes, pay for this advice. There is no legal requirement to do so, but employers may wish to offer to pay any such fee, or a contribution towards it, in the interests of ensuring that the employee gets the necessary advice. This clause sets out how much an employer is willing to contribute. If the employer is not contributing anything, this clause should be deleted.

 Clause 11: Entire Agreement and Enforceability

In many cases the parties will want the settlement agreement to supersede any previous agreement between them, such as the terms of the employment contract. If this is the intention of both parties then should be included to make this clear. In Scotland this clause may be open to challenge if the statement does not genuinely reflect the common intention of the parties.

Clause 12: Jurisdiction

 This clause sets out the jurisdiction under which the agreement is made and optional wording is provided for agreements that will be covered by the law of England and Wales, and those that will be covered by Scots law.

Our Employment Team, Mary Nimmo and Jacqueline Ross are experienced negotiators who can provide advice on the drafting of Settlement Agreements to ensure their validity; and discuss the options available to employers/employees who are offering/ or receiving them.

Please contact our Legal Reception to book an appointment and discuss the terms of your agreement. 

Settlement and agreements, Munro Noble advise the best way.