Chris Hadrill, the partner in the employment team at Redmans, gives his analysis of what he thinks are the top 10 pitfalls to employees negotiating settlement agreements
- The timing of the termination – making sure it works for you
- The value of the ex-gratia payment – increasing it as much as possible
- Dealing with notice pay properly
- The proper use of confidentiality clauses
- Dealing with bonus payments
- Checking your contract of employment for restrictive covenants
- Making sure you’re paid benefits (pension contributions, healthcare etc.)
- Provisions relating to confidential information
- Not obtaining independent legal advice from a suitably-qualified adviser
- Not getting a contribution to your legal fees from your employer
The timing of the termination – making sure it works for you
If you’re being offered a settlement agreement then you should ensure that the timing and method of the termination works for you. There are generally three methods of terminating employment via a settlement agreement: 1) working out your notice period; 2) going on ‘garden leave’ for your period of notice; and 3) your employment terminating (almost) immediately and you being paid in lieu for your notice period.
Carefully review your situation and determine what’s best for you: one mistake that employees make is often just accepting that their employer will make them work out their notice period; you may be able to negotiate being placed on garden leave for a period of time or, alternatively, that your employment terminates asap and that you be paid in lieu of your notice pay.
The value of the ex-gratia payment – increasing it as much as possible
The principal benefit of a settlement agreement to an employee is normally the amount of tax-free compensation that they will receive under the settlement agreement. This ex-gratia amount may not always be negotiable, but it normally is: the fundamental principle of negotiating settlement agreement payments is generally “if you don’t ask, you don’t get”. It’s therefore generally worth approaching your employer to see whether the value of your ex-gratia payment can be negotiated (your solicitor may be able to help with this).
Dealing with notice pay properly
On 6 April 2018 the law relating to taxation on notice payments changed: employers must now tax as “general earnings” a portion of a termination award equivalent to the basic pay an employee would have earned had the employee served his or her notice in full (this has been called “post-employment notice pay” (or “PENP” for short)).
A failure to deal with the new tax provisions properly in settlement agreements could potentially cause tax problems for both the employer and employee in the future, so it’s normally important that the settlement agreement identifies the sum that would have been earned had the employee served their notice in full and states that this will be subject to tax and National Insurance.
The proper use of confidentiality clauses
In the wake of the Harvey Weinstein scandal a great deal of focus has been placed on the proper use of confidentiality clauses in settlement agreements – for example, the SRA has recently issued guidance that confidentiality clauses in settlement agreements shouldn’t allow law firms to hide discriminatory or harassing behaviour.
If your employer has engaged in serious misconduct (whatever this is) and you are being offered a settlement agreement then you must consider whether the confidentiality clauses in the settlement agreement are right for you in your circumstances – the best thing to do is to discuss this with your legal adviser.
It should also be noted that settlement agreements cannot and do not prevent employees from making protected disclosures (e.g. disclosures showing that their employer’s conduct has breached the criminal law, breached a civil legal obligation or breached environmental standards) in the public interest.
Dealing with bonus payments
If you normally receive a bonus payment in the course of your employment then you should check your contract of employment (or bonus scheme, employment handbook etc.) in order to determine what criteria you need to meet in order to qualify for a bonus payment upon termination: a lot of employers impose a condition on bonuses that you must be in employment as of a particular date in order to qualify for a bonus in a particular tax year, so if your employment terminates prior to that date it can sometimes make it difficult to argue that you should receive a bonus. It is normally worth approaching your employer, however, to see what you can negotiate regarding your bonus.
Dealing with shares, share options, and RSU’s
If you are entitled to shares in your employer (or you have share options or Restricted Share Units (“RSU’s”) then it is normally a good idea to reference the terms relating to those shares, share options and/or RSU’s in the settlement agreement, as well as how they will be dealt with post-employment, so both you and your employer are clear on how the shares will be dealt with and what will happen.
Making sure you’re paid benefits (pension contributions, healthcare etc.)
A mistake that employees often make with settlement agreements is not checking their contract of employment to see whether they are entitled to be paid in lieu for benefits (if they are being paid in lieu of notice): most contracts of employment state that the employee will normally only be contractually entitled to salary payments if they are paid in lieu of notice, but some contracts of employment are silent on this point or expressly state that the employee is entitled to both salary and benefits (pension contributions, healthcare etc.) if they are paid in lieu of notice – this could involve the employee being entitled to use these benefits for the period of notice that they would otherwise have served (e.g. use of company car, healthcare coverage) or being paid in lieu in respect of some benefits (e.g. employers’ pension contributions, car allowance).
Checking your contract of employment for restrictive covenants
“Restrictive covenants” are, to give a rather brief summary, clauses that restrict an employee’s ability to undertake alternative employment (both during employment and post-employment) or that restrict employees from being able to poach clients of their employer or former colleagues after their employment terminates.
Sometimes employees are unaware that they are subjected to restrictive covenants , or they don’t know what effect restrictive covenants in their contract of employment may have. The first thing that you should do is check your contract of employment (and any other relevant documents) to see whether you are bound by restrictive covenants and, if so, what those mean. It’s a good idea to speak to your legal adviser about the covenants.
Not obtaining independent legal advice from a suitably-qualified adviser
There is a legal requirement that you obtain independent legal advice from a legal adviser on the terms and effect of your settlement agreement in order to render the settlement agreement enforceable; a failure to obtain independent legal advice from a suitable legal adviser will generally render a settlement agreement unenforceable.
If you’re offered a settlement agreement then it’s normally recommended that you approach a solicitor (or another suitably-qualified independent legal adviser) to discuss your settlement agreement with them – specialist employment solicitors will generally have a great deal of experience advising on settlement agreements, and should be able to help you considerably with advising your agreement.
If your employer tries to force you to sign a settlement agreement without making you aware that you should receive independent legal advice first then you should immediately point out to your employer that you should have the benefit of legal advice prior to signing.
Not getting a contribution to your legal fees from your employer
It is not a legal requirement that an employer make a contribution towards your legal fees, but in practice most employers will (for a number of reasons) offer a financial contribution towards the cost of you receiving legal advice on your settlement agreement (this contribution will normally be between £250 plus VAT and £500 plus VAT in value, although it may be more in some circumstances). If your employer is not offering a contribution towards your legal fees then approach your employer and negotiate this.