Settlement Agreement Terms
A settlement agreement generally contains the following terms:
- 1. An agreed termination date;
- 2. Payment of salary and provision of ongoing benefits to the agreed termination date;
- 3. Payment in lieu of notice (unless the employee is working their contractual or statutory notice);
- 4. Payment of any accrued holidays to the termination date;
- 5. Termination/ ex gratia payment;
- 6. A reference;
- 7. Confidentiality provisions in respect of the negotiations leading up to the agreement and the terms of the agreement itself;
- 8. Non derogatory comments obligation
- 9. Return of any company property;
- 10. Reiteration of any post termination restrictions that are set out in the contract of employment or a provision for new restrictions;
- 11. Contribution towards an employee’s legal fees;
- 12. A full waiver by the employee of any specific employment related claims or rights.
- 13. An Advisors certificate for signature by ourselves; and
- 14. Sometimes a reaffirmation provision
It is usual for an agreement not to settle claims in respect of an employee’s accrued pension rights, as these have accrued in the past and cannot retrospectively be removed by an employer outside the rules of the pension fund. In addition, there is usually a clause dealing with any future claim for personal injury against an employer. Personal injury claims are either excluded from the agreement completely or the employee only signs away the right to pursue claims for injuries of which they are already aware.
In terms of the termination payment, this may be offered on a tax-free basis. Tax issues are complicated and will vary from case to case. Generally speaking up to £30,000 can be paid free of tax provided it is paid as compensation for loss of employment and does not contain any contractual entitlement such as notice pay, holiday pay or salary. New rules came in in 2018 which changed the way in which payments in lieu of notice can be dealt with under the terms of a settlement agreement. You may see the term Post Employment Notice Pay (PENP) in the agreement. We can not advise you specifically on tax matters but we can certainly signpost you the best advisors if necessary.
