Terms in settlement agreement

The essence of the agreement is the employer’s offer of a compensation payment in return for the employee’s agreement not to progress his or her claims in the courts. These terms are expressed prominently in the document, with the compensation payment being offered in ‘full and final settlement’ of all the employee’s employment claims.

After an employee leaves employment he or she will remain under an implied (unwritten) duty to keep confidential any information that amounts to a trade secret. The obligation is one of unlimited duration.

An employer may want to remind the ex-employee about their obligation to keep the employer’s business affairs confidential and will include an express confidentiality clause to this effect in the settlement agreement.

Businesses will always seek to protect themselves against additional tax that HM Revenue & Customs may assess due, by including a tax indemnity clause in the settlement agreement.

The tax indemnity is a promise by the employee to make good the loss sustained by the employer (relating to tax payments) and to compensate the employer for such loss.

An employer will want the employee to agree not to make any derogatory comments following the termination of employment. Such a non-derogatory comments clause will favour the employer; it may also extend protection to other officers and employees that work for the employer.

There is a good argument that protection should be mutual, with the employer offering the employee similar comfort.

Confidentiality regarding the terms of the settlement agreement itself is dealt with via a non-disclosure clause. Colloquially this is referred to as a ‘gagging’ clause.

The obligation not to disclose details of the termination arrangement can be made reciprocal.

Clauses to restrict the employee in their work activities following termination are called restrictive covenants or post termination restrictions. They may prevent the employee from working with a direct competitor, or from dealing with old customers, clients and suppliers.

Post termination restrictions may already feature in the employee’s employment contract. Otherwise the employer may feel justified in incorporating restrictions in the settlement agreement as part of the termination arrangement.

To be effective the employer has to make a payment against these restrictions; usually a small sum is allocated.

The form of work reference that the employer will provide about the employee to future potential employers of the employee, can be included in the agreement.

These days a reference is commonly restricted to the bare facts of the work relationship (start date, end date and job title).