Settlement agreements for Senior Executives (five things HRs should prepare for)

Settlement agreements are a useful tool to end cleanly the employment of an unwanted senior executive or member of staff, says Jacqueline Kendal, Senior Associate at Rosling King LLP. She suggests the following tips to ensure that you get the most out of them…

Start with sensible drafting

Jacqueline Kendal. Senior Associate at Rosling King LLP.

Most of the time settlement agreements are used when employers want a smooth quick exit in respect of the senior executive. Accordingly, it is worth considering what concessions may well be sought and whether they could be agreed to and inserted before the settlement agreement goes to the senior executive or their lawyer. For example, if as an employer you want a clause requiring the employee to keep the circumstances and terms of the settlement agreement confidential, consider whether you are prepared to offer that as an employer you will use your reasonable endeavours to ensure the same.

Equally, the tax indemnity clause should allow the employee, at their own expense, an opportunity to challenge HMRC’s decision, in the event they seek to tax and penalise any termination payment which the parties consider to be tax free. If you are prepared to make these concessions in any event then they should go in the first draft of the agreement sent to the employee or their lawyer as it will ultimately save time and money on both sides and allow for a quicker completion.

Refer to the Contract of Employment

It is good practice to specify the contract of employment in the settlement agreement. A senior executive will normally have post-termination restrictions or restrictive covenants in their contract of employment which the employer will want to preserve and may need to rely upon later. Referring to the relevant employment contract just makes these clearer, easier to locate and assists enforceability but it also prevents a mistake.

Recently, I advised an individual whose employer had not looked at her personnel file or checked her signed contract of employment but simply relied upon their precedent contract of employment. I know this because the settlement agreement referred to clause 16 as containing post-termination restrictions which it sought to preserve. However, my client had never had a written employment contract and therefore had no post-termination restrictions whatsoever. She started working with her employer in excess of 20 years ago and was not provided with a written contract of employment at any point.

Think about the Background or Preamble

One of the main advantages of a settlement agreement to an individual is that the lump sums can be provided free of income tax. Of course, in theory at least the employer is protected by the tax indemnity clause should HMRC decide that the payment should have been paid through the PAYE system but HMRC is likely to come to the employer first. The employer must then seek the costs, penalties and tax back from the employee, which may be difficult; what if the ex-employee has nothing left and has not found employment?

In addition, HMRC may not stop at querying the one settlement agreement but may consider it worthwhile to look through every settlement agreement for the last few years; thereby increasing the burden on the employer’s Human Resources department. The background or preamble to the settlement agreement is a good opportunity to explain how it is thought by the parties that their settlement agreement falls within the taxation exemption.

A proper contribution towards legal fees

No settlement agreement is valid or enforceable unless the individual who signs it has been independently advised by a relevant legal adviser holding a practising certificate and insurance in respect of the advice given. Although there are the equivalent of legal supermarkets, who are prepared to complete settlement agreements for much less, a reasonable minimum contribution to legal fees for the independent advice offered by a legal adviser to an individual is £500 plus VAT.

Below this figure and the individual is likely to receive substandard advice, which may also mean that the settlement agreement contains errors which may not assist the employer either. This should enable someone who is an employment lawyer to review the settlement agreement and make minor corrections to the drafting, picking up and correcting errors.

For example, we reviewed a settlement agreement which contained a clause requiring an employee whose termination date was some months into the future to deliver up all company property on completion of the settlement agreement. Such a clause is not only unfair on the individual concerned but would also leave the employer without any recourse when the termination date does arrive.

Many of the employees concerned had been referred to a legal supermarket and their agreements had simply been completed without amendment. The three clients who instructed us were the first to require amendment of this clause.

Senior executives will often have additional benefits that need more complicated advice such as shares, share options or other LTIP schemes. There may also be tax advantages to both employer and employee to structuring the payments or receipt of benefits a certain way. So some flexibility towards the senior executive’s legal costs is worthwhile.

Is your Settlement Agreement up to date?

In order to save money some employers take a settlement agreement used for one individual and amend it for the next employee, using it as a precedent without seeking further legal advice. The whole point of a settlement agreement from an employer’s perspective is to ensure that there can be no claim by the ex-employee in respect of their employment. However, if the settlement agreement is out of date then the employer is not getting the full benefit as change in the field of employment law is constant.

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