This week, I have been helping both employer clients and individuals with settlement agreements and my tip is: how up to date are your contracts of employment?
I have been asked this week to both draft and also advise on settlement agreements.
Settlement agreements are legally binding agreements which can be used by employers and employees to settle genuine employment disputes. There are certain legal formalities which have to be followed when drafting or giving an employee a settlement agreement to ensure it is legally binding. One of these is that the employee must seek independent legal advice on the terms of the agreement. There is an ACAS code of conduct as well which does not have consequences in terms of compensation in the same way as the Code of Practice dealing with disciplinary and grievance; but it can be taken into account by an employment tribunal in a relevant case. One of the key points of the Code is that employers should give employees a period of at least 10 calendar days to review and consider the written agreement (rather like a “cooling off” period). Settlement agreements can be used to settle a grievance or an employment tribunal claim. They are also used frequently when ending employment, especially in redundancy situations.
My Top Tip! Review your contracts of employment
Before I draft or advise on a settlement agreement, I always ask to see someone’s employment contract. This is so I can check things like their notice period and also any benefits that need to be paid or covered off in any settlement terms. The employment contract is fundamental to the employment relationship and yet when did you last review your employment contracts more generally, but specially in relation to termination provisions?
Notice provisions – length of notice, garden leave and payment in lieu of notice clauses (PILON) are all incredibly beneficial for employers to have in their employment contract. Also, clauses around the logistics of termination, for example, returning company property are useful to have. I am seeing more and more contracts from employers which do not contain a simple PILON clause. PILONs allow employers to end employment and pay notice – which I would also advise should state clearly that notice pay reflects basic salary only – rather than a person work their notice. They are really useful tools to have in your HR toolbox.
PILON payments are taxable whether you have a contractual clause or not; however, including a PILON clause can preserve the effectiveness of any post termination restrictions since paying in lieu when there is not the legal right to do so in the contract is effectively a breach of the employment contract and its terms. There is also an argument that an employee should receive the benefits for the PILON period in the absence of a contractual PILON clause.
The next steps to reviewing an employment contract
Pull up your employment contract template – when was it last reviewed? Be pragmatic and strategic in the way you look at your documents and think: if we were to end the person’s employment, how would we do that? What would your protection be?
Also, when did you last review your business protection clauses more generally? I see many employment contracts without simple confidentiality clauses which again would be helpful if going on to use a settlement agreement. Do you review contracts of employment when someone is promoted? As someone’s career progresses and they have more client contact or could pose a risk to the business if they were to leave, perhaps these individuals need longer notice periods or post termination restrictions?
Always take advice on drafting contracts or if you are thinking about imposing new terms (especially business protection clauses) as there are certain legal issues and risks to think about.