What are the important clauses in my settlement agreement?

What are the important clauses in my settlement agreement?

When presented with a settlement agreement, especially for the first time, the length and content can often be overwhelming.

You should understand that settlement agreements are usually drafted by your employer’s solicitor, so will seek to protect your employer as much as possible and, as such, place onerous obligations on you.

In our experience, there are standard clauses that get more attention than others and we have summarised the main ones below. Obviously, whether these clauses appear in your settlement agreement and how they are drafted will dictate how much protection your employer has. Also, your personal circumstances will impact on whether such clauses are a concern.

1. Settlement

As you have probably gathered by now, by signing a settlement agreement you are settling every possible employment-related claim you may have against your employer.

Once signed, you will be unable to bring a claim against your employer in either the Employment Tribunal or County Court. As the name implies, the agreement is in settlement of your claims and, in return, you will benefit from certain terms; usually financial. 

There will be three claims that survive the settlement agreement, and which should be specifically mentioned. These are:

• for any latent (i.e. unknown) personal injury claims you may have;
• to enforce your accrued pension rights; and 
• to enforce the terms of the settlement agreement. 

Other than these three claims, you will be unable to sue your employer once you sign a settlement agreement.

2. Tax indemnity

It’s highly likely that your settlement agreement will include a tax indemnity from you to your employer in relation to tax, national insurance contributions, interest, penalties costs etc.

These clauses place all liability and responsibility for those sums on you.

Therefore, it means that while your employer is offering you a tax-free sum, it is not giving any guarantee that this is the case. If it transpires that further tax is due, ultimately, you will have to pay this.

The way the tax indemnity works is that your employer will pay you a tax-free lump sum, but if HMRC decides that some or all of that should have been taxable, HMRC seeks recovery from your employer, and your employer pays those to HMRC, your employer can rely on the tax indemnity and get the money back from you.

You also need to be aware that the indemnity extends beyond just tax. The clauses will probably also provide that you are responsible for things like costs, interest and penalties. Therefore, if the HMRC seeks to recover tax and, because that tax is paid late, it imposes a fine, penalty or interest then all of that can be recovered by your employer from you.

These clauses will appear in every settlement agreement and are pretty much non-negotiable.

You can try and limit the impact of the by insisting that your employer includes additional wording that means it must notify you in the event HMRC investigates the payments, so you have an opportunity to challenge HMRC’s assessment before your employer makes any payments to HMRC.

3. Non-derogatory

The settlement agreement will also provide that you are unable to make any derogatory or detrimental remarks about your employer or any member of staff.

Sometimes these clauses will apply retrospectively, so if you have said something untoward you may immediately be in breach when you sign the agreement. However, the clause may only apply once you sign, in which case, any previous misdemeanours might be ignored.

What you want to ensure is that the clause is reciprocal, so your employer is also giving a contractual commitment to you that it will not make any derogatory statements about you.

Often the wording that your employer gives will seem less certain, but that’s common. Your employer will not be able to ensure that each employee honours that clause. Therefore, your employer’s obligations will often be for it to use “reasonable endeavours” rather than a certain strict commitment.

4. New employment

There may be a clause in your settlement agreement that states you are promising that you have not accepted, nor been offered, nor expect to receive an offer of any form of alternative employment or income. The clause will cover any employed work as well as any self-employment or running your own business.

If you have no other job, nor any expectation of an offer then you don’t need to worry about this clause.

However, if you are in the (fortunate) position that you have secured another role as well as a potential pay out, then you will need to proceed carefully. If you sign the agreement with that clause in it, you will immediately be in breach. If you tell your employer that you have another job, you risk your employer withdrawing the offer (as it will know that you can mitigate your loss and any claim you might pursue will have little, if any, financial value).

This is a difficult dilemma and so if there is another job offer that has been made or may be made, this is probably a clause on which you will want to negotiate, although even seeking to negotiate on it can cause your employer to become suspicious. 

Given the delicate nature of this situation and the potential implications, we strongly recommend you seek legal advice.

5. Repayment

The settlement agreement will almost certainly provide that, if you breach the agreement you will have to re-pay some or all the money. 

Sometimes, it provides for you to repay the compensation in full. More usual, the agreement will provide that you must re-pay your employer an amount based on the loss it suffers as a result of your breach.

The latter type of repayment clause is far more likely to be enforceable, as the loss you have to repay is based on the loss your employer suffers. The first type of repayment clause, which requires to you to repay a fixed sum regardless of your employer’s loss, could be a penalty clause, which are often unenforceable.

There is also likely to be a clause that requires you to repay the money if you commence litigation, as by signing the settlement agreement you are confirming you will not bring any employment-related claims against your employer. Most people we advise understand this, so are not concerned by this clause. If having signed a settlement agreement, you tried to sue your employer you wouldn’t get very far as the Employment Tribunal is unlikely to accept your claim. Given this and the requirement to re-pay the money to your employer, you would be very ill advised to try and bring a claim having signed a settlement agreement. 

6. Confidential information

The settlement agreement should set out the way in which you must honour your employer’s confidential information. Alternatively, it may simply refer to the duties set out in your contract of employment. Either way these clauses must be respected.

Even if your contract and the settlement agreement are silent on this point you remain under duties to your employer (e.g. a duty of fidelity) that places obligations on you not to use certain high-level confidential information etc.

7. Restrictive covenants

These are clauses that limit your ability to accept alternative employment, to solicit or poach your employer’s customers or clients and to employ its staff. Your employer may try and use the settlement agreement to impose such restrictions on you.

If such clauses appear in your contract of employment, then you’re likely to be bound by them in any event and they will continue after your employment has ended even if you sign a settlement agreement. 

If no such clauses appear in your contract of employment then you need to take advice on whether it would be appropriate for you to accept such restrictions as part of the settlement agreement, or whether that will impose too much of a restriction on you from being able to find acceptable alternative employment.

If you have no contractual restrictions and your employer is seeking to impose something in the settlement agreement, then you probably have an argument to ask for a payment equivalent to the period of the restriction (unless the offer already exceeds that). Generally, you are better off resisting such terms as part of your settlement, as it could create future issues depending on what job you may later secure (or the clauses may prevent you from being able to secure a particular job).

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