Employment – settlement agreements (part two)

In the second of two parts looking at settlement agreements, the National Golf Clubs’ Advisory Association (NGCAA) explores what the contents of a settlement agreement between a golf club and a departing employee are.

The first part can be accessed here.

Subject to certain statutory requirements, the contents of a settlement agreement are largely at the discretion of the parties.

Matters commonly dealt with in the agreement are set out below:

Reason for termination – where the reason for termination is detailed in the agreement, careful consideration should be given to the potential impact this may have on the tax treatment of the payment, but also any effect on how the employee is treated under a share plan / incentive scheme, or their ability to claim certain benefits. Any reason, if one is given, should always reflect the actual situation so as to avoid potentially liabilities arising.

Payment of salary until the termination date – This confirms the salary payment(s) the employee will receive up to (and including) the agreed termination date.

This may vary depending on the content of the employee’s contract but usually includes:

• basic salary and benefits; and

• payment in lieu of any accrued but unused holiday entitlement (or repayment of any holiday taken in excess of entitlement).

Notice payment – In some cases an employee may work their notice (or be placed on garden leave) and this should be recorded in the agreement. Often, however, a club may wish to terminate the employment earlier by making a payment in lieu of notice. This sum should be subject to tax deductions in the usual way (see last month’s article).

Termination payment – Commonly referred to as compensation for loss of employment. The level of this payment is usually the crux of the agreement from an employee’s perspective and can be subject to some negotiation. Compensation payments can usually be made free of tax up to an upper limit of £30,000, over and above that income tax is payable (see last month’s article).

Tax indemnity – Employers should require an indemnity from the employee in relation to protect them from the costs of any demands for tax / national insurance contributions or associated fines or penalties where HMRC challenges the tax treatment of certain payments under the agreement (see last month’s article).

Confidentiality – All employees have common law duties to protect confidential information of their employer / former employer. Many employers have specific clauses in their contracts to enhance this basic protection to safeguard legitimate business interests. This can be restated in the agreement for the avoidance of doubt. It is not, however, possible to prevent an individual from making a protected disclosure (that may involve confidential information), such as ‘whistleblowing’.

Post-termination restrictions (re-assertion or modification) – Where an employee is subject to existing restrictions (such as non-solicitation of members for a period of time after they leave employment at the club) in their contract of employment, this can be reasserted for the avoidance of doubt. Any modification or introduction of new restrictions should usually be accompanied with nominal consideration (such as payment) to make them effective and binding.

Non-derogatory comments – This prevents the making, publication or communication of any harmful, negative or derogatory comments about the other party. Commonly this is expressed to be a mutual obligation so both the club and employee are bound by it. Any agreement by a club should be subject to a ‘reasonable endeavours’ proviso to minimise the likelihood of liability for employees’ actions.

Secrecy – This aims to protect the circumstances, negotiations and terms of the agreement from being freely discussed subject to limited exceptions (immediate family, legal advisors and so on.)

Contribution to legal fees – In order for a settlement agreement to be valid, the employee must seek independent legal advice on the terms. It is not mandatory, but is common practice that an employer contributes to this advice. Average contributions are in the region of £250 to £350 plus VAT. This usually covers an hour or so of legal advice. Often employees ask for an increased contribution, and it may be reasonable to agree to that particularly when dealing with senior employees and / or complex exit arrangements.

Waiver of existing claims by the employee, including a warranty that the claims listed in the agreement are the only claims which the employee has against the club. A settlement agreement should relate to a ‘particular complaint / proceedings’. The specific claims being waived should therefore be identified and a ‘catch-all’ waiver might also be included. These waivers afford the club the security that the employee cannot pursue any of the statutory, contractual or common law claims listed against the organisation without being in material breach of the agreement.

(However, the following rights cannot be waived:

• An employee’s right to enforce the terms of the agreement;

• An employee’s rights in respect of accrued pension rights and latent personal injury claims (that is, those not known); and

• Although the agreement can be drafted to refer to waiving actual or future claims, it is open to challenge as to whether future claims can be validly waived.)

Employment tribunal proceedings – Settlement agreements will usually include a warranty from the employee that they have not issued any proceedings or, if they have, that these are immediately withdrawn to provide security that those claims will not be pursued any further.

Additional warranties from the employee that the employee does not have an existing job offer and / or that they have not committed a repudiatory / fundamental breach of contract entitling an employer to dismiss summarily. The reason for this is that it is likely to impact upon the club’s decision to offer a settlement agreement and the amount of compensation offered.

Cooperation – This requires the employee to cooperate and assist the club with internal investigations or legal proceedings that may arise after termination and where they had relevant knowledge or involvement. It is reasonable for the club to agree to reimburse the employee’s reasonable pre-approved expenses. Where cooperation is foreseeable employees may seek to negotiate a day rate or to recover lost earnings from new employment.

Agreed reference – This can either be a factual only reference (in line with policy (if applicable)) or it can be more detailed, depending on the circumstances of the employee’s departure. Any reference should be provided without admission of liability for any reliance placed on it. It is also possible to agree and include the wording on any internal / external announcement.

Recoupment – A repayment clause of this kind is intended to allow the employer to argue that it can claw-back the termination payment in the event the employee is in material breach of the terms of the agreement. For example, bringing a claim they have waived. However, such clauses must be carefully drafted as they can be deemed as a ‘penalty clause’ and as such, unenforceable and ineffective in terms of recovery sums paid. This is on the basis that the money paid appears to be intended to apply undue force on the employee to perform its obligations under the contract (that is, not pursue a claim), rather than to compensate them for loss of employment / breach of contract. Including this provision is recommended as it may serve as a deterrent.

Indemnity – The protection provided to the club under an indemnity is meant to avoid the problems associated with a ‘repayment’ type clause. The indemnity clause requires the employee to essentially cover a club’s costs defending an action brought in breach of the agreement. Any successful award would typically be set off against the termination payment made (if not recovered) so the employee does not double recover.

Reaffirmation / re-execution – This is an optional clause which should be used where there is a significant gap in time between signing of the agreement and termination of employment. This requires the employee to reaffirm the waiver of claims and certain other provisions of the agreement before payment is made to ensure the basis of no additional claims has arisen in the intervening period.

Advisors’ certificate – A certificate by the employee’s advisor that they meet the definition of relevant independent advisor and that they have given the advice required, as set out in the agreement. This is a requirement for the agreement to be valid and binding.

Other miscellaneous clauses are:

• An entire agreement clause to ensure that the employee confirms and agrees they are not entering into the agreement in reliance on any other discussions.

• A governing law and jurisdiction clause so the parties are clear on how to enforce the agreement.

• A clause which provides that the agreement is ‘without prejudice and subject to contract’, meaning it is off the record until signed and dated by both parties. This means the offer can be withdrawn by an employer at any stage up to signature.

If your club wishes to offer an employee a settlement agreement, please contact Alistair Smith at the NCGAA on 01886812943 or office@ngcaa.co.uk