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Negotiating the terms of your settlement agreement

Posted on 28th May 2013
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Use this checklist to help you understand and decide if you are happy with the key terms of your settlement agreement.

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Simon Quantrill Simon
Managing Partner Telephone: 01473 688100

Whilst on garden leave you must be paid your normal salary or pay and continue to receive all contractual fringe benefits, including, for example, the continued use of your company car

The contents of a settlement agreement (the new name for a compromise agreement) can vary greatly because no two cases are exactly the same. Usually, however, an agreement will contain clauses dealing with the following practical issues:

Your ‘Termination Date’

This is the date on which your employment will or did end. In some cases, when your employment has not yet come to an end, it is important to negotiate this date because it may influence your entitlement, for example, to a bonus or pension payment. It is also the date when your salary, accrued holiday and other fringe benefits will usually be paid up to.

Caution: if you enter into a settlement agreement some weeks or months before your Termination Date this may cause HM Revenue and Customs to decide that all or part of your termination payment is taxable.

Garden leave

If your dismissal or resignation is on notice, for the duration of your notice period, your employer may require you to stay at home and not come into or do any work – hence the name ‘garden leave’.

If your contract of employment or service agreement gives your employer the right to put you on garden leave there is probably nothing you can do to avoid it because you will be under a contractual obligation to stay at home. However, if your employer does not have this contractual right the issue is negotiable.

Garden leave is often used to stop an employee from moving to a new employer immediately so that the employer’s customer or client connections are protected.

Whilst on garden leave you must be paid your normal salary or pay and continue to receive all contractual fringe benefits, including, for example, the continued use of your company car.

You may be subject to various restrictions during your garden leave, for example, not to contact any customers or any work colleagues. Access to your work emails may also be turned off.

Holiday pay

Any accrued but untaken holiday pay has to be paid up to and including the Termination Date. This payment has to be paid after normal PAYE deductions of income tax and national insurance contributions.

Holiday pay accrues during any notice period or garden leave, but does not accrue beyond your Termination Date.

If you have taken more holiday than you have accrued, your employer may have the contractual right to deduct holiday pay from payments made to you under the settlement agreement. 

Your employer should confirm the number of days’ holiday it will pay to or deduct from you. If you dispute this number you should be prepared to show why your employer’s calculation is wrong.

Fringe benefits

A fringe benefit includes your entitlement to items like a company car or car allowance, private health insurance, a pension, life assurance, or professional subscription fees etc.

You can generally expect to be compensated for all fringe benefits for at least the duration of your notice period but this will depend on the terms of your contract if you are being dismissed under a payment in lieu of notice clause. Additionally, if you are being unfairly dismissed or discriminated against it should be possible to argue that you should be compensated for a longer period of time.

Pension rights

The settlement agreement needs to deal with any employer contributions. The value will depend if your pension is a money purchase or a final salary scheme.

Resignation for all directorships

If you are a director of your employer and any subsidiary companies, you can expect the settlement agreement to include your agreement to resign from all such positions.

Shareholdings and share options

If you are a shareholder or have share options, you will likely have entered into an agreement regarding them separately.  The settlement agreement may well simply reiterate the terms which apply when your employment is brought to an end.

Employment references

It is common for the settlement agreement to include an obligation on the employer to provide to any prospective employer an employment reference in an agreed form and to promise that any telephone or verbal reference reflects the terms of the written reference.

It is a rare case where it proves impossible to reach an agreement about the wording of a reference. However, problems do arise because your employer owes a duty of care to the recipient of the reference; it must not be misleading or inaccurate. This can mean that your employer is unwilling to provide more than a simple factual reference confirming your start and end dates, your job title and perhaps the reason for your departure from its employment.

If the provision of an employment reference is an important issue for you, we are experienced at resolving this issue.

For more details about employment references please see our checklist.

Out placement counselling

This is an optional benefit that some employers offer especially to senior managers or executives. Out placement counselling covers help with a range of services including writing CVs, interview technique and learning new business skills. Often a tailored package is agreed with the employee. Out placement is provided by an external provider who will be paid directly by your employer. The service can help you find suitable alternative employment more quickly.

Tax treatment of the payments to you

For a discussion about the tax treatment of compensaiton payments please see our Briefing note The tax treatment of compensation payments

Your employee tax indemnity

In almost all cases your employer will insist on you providing a tax indemnity in relation to any compensation paid to you. We will ensure that the terms of the tax indemnity are reasonable. In particular it is important that the indemnity includes on obligation on your employer to give you prior notice of any tax demand from HM Revenue and Customs and the right (at your own expense) to challenge it.


You can expect the settlement agreement to include an obligation on you to keep confidential the terms of the agreement and all details about what your employer will pay you. For this reason you must be careful not to discuss or disclose the settlement agreement with anyone else because this may well put you in breach of your duty of confidentiality.

You may also be prevented from making or publishing any announcement about your dismissal. An agreed announcement can be included in the settlement agreement so that both you and your employer know what can be safely said to your former colleagues, customers, clients or other third parties.

In most cases you will want a similar duty of confidentiality from your employer so that it cannot say anything disparaging about you or your departure from your employment.

Restrictive covenants

The settlement agreement may simply include a reminder that you will continue to be bound by the restrictive covenants included in your existing contract of employment or service agreement. Alternatively, your settlement agreement may include revised or completely new restrictive covenants.

Whether the restrictive covenants are potentially enforceable against you depends on a wide range for factors which we will discuss with you.

The basic rule is that if your employer is dismissing you in breach of your contract of employment then any existing restrictive covenants “fall away” and become unenforceable against you.

Caution: If you are asked to agree to revised or completely new restrictive covenants special tax rules apply. To avoid all of your compensation potentially becoming taxable, your employer has to allocate a specific sum of money to the covenants. We will ensure this issue is correctly dealt with in your settlement agreement.

Agreed internal announcements and press release

Often it can be helpful to both you and your employer for an internal announcement to be agreed so that former colleagues are informed about your departure in a way you are happy with.

Sometimes an agreed statement or press release is used to notify customers or clients of your leaving.

Legal fees

In almost all settlement agreements the employer will agree to pay a contribution towards the employee’s legal fees. Often this contribution will be sufficient to cover all of your legal fees. The value of the contribution is subject to negotiation with the employer. 

We will make sure that the appropriate arrangements are included in the agreement to avoid you having to pay tax on your employer’s contribution to your legal fees.

Repayment terms if you breach the terms of the settlement agreement

Your employer may well require you to repay all of the compensation in the event that you act in material breach of any of the key terms of the settlement agreement; for example if you breached your duty of confidentiality or if you commenced a claim in the employment tribunal against your employer.

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  • prepare a short chronology or list of key events
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