Settlement Agreements – commonly negotiated terms

In this article, the third and final guide to drafting settlement agreements in our masterclass series, we focus on those extra terms which are most commonly sought by both the employer and the employee and the limitations which might be placed on them.

Extra terms

Our previous two articles have considered how settlement agreements work and when they should be used, as well as the terms which are legally required to be included within a settlement agreement for it to be an effective waiver of employment rights.

However, there are also a number of terms which are commonly included, either for the benefit of the employer or the employee. Some of the key ones are detailed below.

Employer friendly terms

(1) Confidentiality of the settlement and derogatory comments

Employers will often be keen to ensure that the package offered to an employee under a settlement agreement remains confidential. For this reason, confidentiality terms are common within settlement agreements. These are often wide in scope, covering not just the fact and/or terms of the settlement agreement, but also the circumstances surrounding the termination of the employee’s employment. Employers also want to ensure that ex-employees do not spread derogatory comments about the organisation or the people who work within it, and terms preventing the making of such comments are also common.

However, employers need to be careful that such provisions are not drafted too widely and do not seek to prevent employees from making complaints under whistleblowing legislation or from reporting potential criminal acts to the police. This is particularly so given the general scrutiny which non-disclosure agreements are receiving in the post #MeToo era.

Employees also need to be careful that such clauses do not prevent them from speaking to their family, professional advisers or from explaining their work history to a recruitment agent or potential new employer. Employees also often seek to make any non-derogatory comments clauses reciprocal so that their reputation is also protected.

(2) Tax indemnity

Given the complexity around the taxation of termination payments, employers usually seek an indemnity from the employee for any additional tax which becomes due on the payments made under the settlement agreement. Whilst such provisions are generally accepted, given that the employee ultimately receives the benefit of certain payments being made tax free, employees should seek the ability to challenge any tax with HMRC before the employer makes payment and enforces the indemnity.

(3) Legal assistance

There may be circumstances in which the departing employee is still required in the future to assist the business in either the investigation or defence of legal claims. If so, it is advisable for a clause to be included in the settlement agreement explaining the extent of ongoing co-operation required. Employees may well seek reimbursement of lost salary and/or expenses they incur as a result and any agreement as to what the employer will pay for such co-operation should be included in the settlement agreement.

Employee friendly terms

(1) Announcement / reference

One of the main benefits of negotiating an exit package with an employer is the ability to agree a favourable reference and/or the terms on which the employee’s departure will be announced to the business and marketplace.

The terms of any announcement and/or reference should be clearly set out in the settlement agreement, and employers required not to deviate from any written form of words even when giving oral references. When acting for an employer, they will often want the right to amend a reference in the future if new facts come to light that change the agreed reference.

(2) Continuation of benefits

Employees often seek to continue to receive key benefits for a period of time following termination of employment, particularly where they receive payment in lieu of their notice period. Whether benefits such as private medical insurance can be continued will be subject to the rules of the particular scheme in place at the time. Commonly requested benefits include continued use of a company car or mobile phone, or continued access to the employee assistance programme. However, employees should be mindful that the value of any benefits which are not part of a contractual entitlement during the notice period will be taken into account in terms of calculating the £30,000 tax free limit on compensation payments.

(3) Outplacement support

Another commonly negotiated term is the provision of outplacement support, to help employees to find alternative employment once they have left the business. The settlement agreement should include details of who will provide the support, for how long and at what cost.

Conclusion

This concludes our guide to drafting of settlement agreements. The next part of our drafting masterclass series turns to drafting of consultancy agreements. In particular, we will consider the importance of identifying the correct status of a consultant and the impact which certain contractual terms can have on that status, such as the requirement to give personal service.