The Importance of Crucial Clauses in Settlement Agreements

Rachel Barnes, Marketing & Onboarding Manager

Estimated read time: 4 Minutes

The fast moving, ever-changing field of employment law means that it is essential to have access to the very latest knowledge and advice on the areas that are relevant to your business.

Here Steven Mather, one of Nexa’s highly experienced employment law experts, looks at the importance of checking your employment contracts for a certain clause, and highlights the benefits of employees taking legal advice in relation to termination agreements.

I recently acted for an individual whose employment was being terminated by way of a settlement agreement, for reasons which are not relevant to this article. As a settlement agreement solicitor, I’ve helped hundreds of employees with their termination agreements.

I successfully managed to get my client an additional £15,000+ on top of a years’ salary, because the contract of employment was missing some really crucial clauses.

My client was employed by a Formula 1 team.

A few years back, the employer had decided that to stop its employees going to competitors, they would introduce a 12 month notice period. That’s fair enough, and it appears to have been introduced and implemented properly (there’s a process to introduce new terms to existing employees’ contracts).  Their intention was a 12-month notice period, on garden leave and some additional restrictive covenants thereafter.

However, the downside of a 12-months’ notice period is that if the employer wishes to terminate someone’s employment, then they must pay 12-months’ notice (if that wasn’t obvious).

Failure to pay the correct contractual notice period would give rise to a claim for what is known as wrongful dismissal in an employment tribunal. Wrongful dismissal claims are entirely separate to unfair dismissal claims. Wrongful dismissal claims are a claim for a breach of contract claim, and a wrongful dismissal would free the employee from any restrictive covenants.

The purpose of damages in a wrongful dismissal claim is to put the employee in the position they would have been if the contract had not been breached (a principle that stems from a court decision in 1848).  Therefore, damages will reflect the net value of salary and any other contractual benefits to which the employee would have been entitled had they been allowed to work out their notice.

However, clauses in the employment contract can change this general rule.

If there is a clause that says a Payment in Lieu of Notice (PILON) will be made, then even if it is not, the employees claim would be for liquated damages (a money claim) on that breach rather than to claim wrongful dismissal.

If there is a clause that says a PILON might be made at the employer’s discretion, then the discretion stands; if it is paid, there is no wrongful dismissal claim.

In my case, we were negotiating the termination of employment by way of a settlement agreement, and so no wrongful dismissal claims had arisen, but nonetheless would potentially arise if the employee didn’t get everything they were contractually entitled to.

The contract in question permitted a PILON to be paid on a discretional basis but contained no further provisions.

What this meant is that, on termination, my client was entitled to get everything he would have got had he worked for that 12-months’ notice period. Such as:

• holiday*
• pension payments
• contractual bonus
• PMI
• life insurance

All the employee’s benefits on top of the 12 months’ notice pay!  (as a matter of transparency, the overall negotiation did not see my client get all the above, as he was entitled to, but most plus a generous compensation on top – some £15,000 more thanks to my work).

But this could have been avoided by better contract drafting by the employer.

The PILON clause should have clearly stated:

1. That the PILON would be in respect of basic salary only;
2. That the PILON would not include any element in relation to:

• • Any bonus or commissions that might otherwise have been due in the notice period (whether contractual or discretionary).
  • Any payment in respect of any benefits which would have been received during the notice period;
  • Any payment in respect of holiday entitlement during the notice period.

This was all simple stuff to add to an employment contract, but alas its absence has cost the employer on this occasion – to the benefit of my client!

So, my suggestion would be to check your employment contracts and look at whether you have a more detailed clause on payments in lieu of notice and if not, give me a call on+44 (0)20 7504 7071 ext 32. There’s probably more detail that can go into other places too.

*Holidays

A quick note on holidays. In fact, the working time regulations has a provision that says that employees should only receive accrued but untaken holiday and does not refer to any rights that would have accrued during the notice period. It is arguable however that if the employee is entitled to more than the statutory minimum under the WTR98, then they should be compensated for those additional days.

Steven Mather is a Commercial Business Lawyer and a Consultant Solicitor with Nexa. For advice on employment law issues, contact Steven on the number above, or email steven.mather@nexa.law