Important clauses in your settlement agreement for you to consider

Important clauses in your settlement agreement for you to consider.

Settlement agreements are not usually short documents, so the length and content can often be overwhelming; especially if you’re receiving one for the first time.

Settlement agreements are usually drafted by your employer’s lawyer, so inevitably seeks to protect your employer as much as possible and, consequently, places onerous obligations on you.

In our experience, your settlement agreement will contain a number of standard clauses (often described as “boiler plate”) and others that should get more attention. We have summarised below the main clauses that you should look out for and consider. 

Your own personal circumstances and whether such clauses appear in your settlement agreement (and how broadly they are drafted) will dictate how and if such clauses are a concern for you.

1 Full and final settlement

By signing a settlement agreement, you are agreeing not to sue your employer and are settling every possible employment-related claim you may have against your employer, its owners and staff.

This means that, once signed, you are unable to sue employer in either the County Court or the Employment Tribunal. The agreement is in “settlement” of your claims and, in return, you will usually be given other benefits; often financial. 

However, there are three claims that usually survive the settlement agreement, and which should be specifically excluded. These are:

• to enforce the terms of the settlement agreement; 
• to enforce your pension rights; and/or 
• for any unknown personal injury claims you may have.

Other than these three possible claims, once you sign a settlement agreement you will be unable to bring a claim against your employer.

2. Tax.

Your settlement agreement will almost certainly include a tax indemnity. This is a promise by you to reimburse your employer for any payments of tax, national insurance contributions (NIC), interest, penalties costs etc.

As such, these clauses place all liability and responsibility for such sums on you.

This means that while your employer is offering to pay you “tax-free”, your employer will not be giving any guarantee that the money is tax-free and, further, if it transpires that further tax (costs, interest etc) is due you will, ultimately, have to pay this.

In practical terms, the way the tax indemnity works is that your employer will pay you the agreed amount tax-free. If HMRC decides that some (or all) of the tax-free payment should have been taxable, HMRC is likely to seek recovery of the tax/NIC etc due from your employer. If your employer pays those sums to HMRC, your employer can, in turn, rely on the tax indemnity from you and recover what its paid to HMRC from you.

You need to be aware/advised that the tax indemnity extends beyond just tax and NIC. The tax indemnity will extend to things like costs, interest, expenses and penalties. Therefore, if the HMRC seeks a recovery and, because tax has been paid late, HMRC imposes a fine, penalty or interest etc, then all of that cost and liability can be recovered from you.

In our experience (of 20 years+), these clauses appear in every settlement agreement and are always non-negotiable.

You can try and limit the impact of the tax indemnity by insisting that your employer adds wording that requires it to notify you in the event HMRC investigates the payments. This way, you should be given an opportunity to challenge HMRC’s assessment before your employer makes any payments to HMRC.

3. New job

Of increasing popularity is a clause that states you are promising that you have not been offered nor accepted, nor expect to receive an offer of any type of alternative income or employment. This clause usually covers any form of self-employment, any employment as well as or running your own business.

If you do not have another job, nor any expectation of such an offer then you do not need to worry about this type of clause.

If you are in the (very fortunate) position that you have been offered or even secured another role, then you need to proceed with caution. If you sign the settlement agreement and it contains this clause, you will immediately be in breach of it. Equally, if you tell your employer that you have a job offer or another role, you run the real risk that your employer withdraws the offer. This may happen because it will know you can ‘mitigate your loss’ by accepting that job so any claim you might have probably won’t be pursued because it will have little, if any, financial value.

This will be a difficult dilemma for you, so while its fantastic to have another job and a payout you need to be careful about what you do.

A further option is to negotiate around the clause, ideally, seeking it removal. However, you need to be very careful as even seeking to negotiate can cause your employer to become suspicious. 

Given the delicate issues this situation creates and the significant potential ramifications, we strongly recommend you contact us to seek legal advice.

4. Non-detrimental/derogatory remarks

Your settlement agreement is likely to provide that you must not make any adverse, derogatory or detrimental comments about your employer or its owners or employees.

Occasionally, such clauses apply retrospectively, meaning that if you have previously said something untoward you will immediately be in breach of the agreement the moment you sign. Usually, the clause only applies from the point you sign, in which case, any previous misdemeanours can probably be ignored.

You should ensure that the clause is reciprocal. This way, your employer is giving a commitment to you that it will not make any adverse, derogatory or detrimental statements about you.  

Please be aware that the wording your employer gives will be less certain, but that’s normal. Your employer is not be able to give an absolute promise that each and every employee will honour such a clause. Therefore, your employer will often be required to use its “reasonable endeavours”. This is usual.

5. Confidential information

Your settlement agreement will set out the way in which you must treat your employer’s confidential information. Alternatively, it may refer to your contract of employment and your duties set out in that contract. Either way, such clauses and obligations must be respected.

If your contract of employment and the settlement agreement are silent on how to treat your employer’s confidential information you remain under implied duties to your employer (known as a duty of fidelity) which place obligations on you not to take or use certain high-level confidential information belonging to your employer.

6. Post-termination restrictive covenants

These clauses limit your ability to do certain things, typically to; solicit or poach your employer’s staff, clients and customers or even to accept certain types of alternative employment. If your contract of employment does not contain any such restrictions, your employer may try and use your settlement agreement to introduce restrictions on you.

If you do not have any such clauses in your contract of employment, you must take advice on any that appear in your settlement agreement and whether it would be appropriate for you to accept them. If they impose too much of a restriction on you from being able to find acceptable alternative employment, they should be resisted.

Generally, you’re better off resisting any such restrictions as part of your settlement agreement especially if none appear in your contract of employment. They could create future issues for you depending on what job you may later secure, or worse, the clauses may prevent you from being able to secure a particular job in the first place.

If you have such clauses in your contract of employment, you’re most likely to be bound by them even if you’ve been unfairly dismissed. Further, they will continue after your employment has ended and will apply even if you sign a settlement agreement. 

7. Repayment

Your settlement agreement will provide that, in the event you breach the terms of the settlement agreement you will have to re-pay some or all of the money/compensation.

These clauses should act as a good incentive for you to honour the terms and the cost and implications of not doing so will be significant.

Your settlement agreement may provide for you to repay the compensation in full. More often, your settlement agreement will state that you have to repay to your employer an amount equivalent to the loss it suffers as a result of your breach.

The latter type of repayment is more likely to be enforceable, as the loss your employer claims is based on the loss it has suffered. The first type of repayment clause that requires to you to repay a fixed amount could be seen as a penalty clause, which can be unenforceable.

There will be a clause that requires you to repay the money/compensation if you commence any claims. This will be in breach of the whole purpose of the settlement agreement as by signing the settlement agreement you are confirming you will not bring any employment-related claims against your employer. In our experience, most clients understand this, so are not concerned by this clause as they have no intention to sue their employer. If you tried to sue your employer having signed a settlement agreement, you wouldn’t get very far as the Employment Tribunal will reject your claim once it knows you’ve signed a settlement agreement. Given this and the requirement to repay money to your employer, you will be very ill advised to bring a claim against your employer having signed a settlement agreement. 

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