Here we share our top five practical tips for individuals departing from a business in circumstances where the employing company is offering severance terms, usually subject to a settlement agreement.
Settelement agreements are a common way of dealing with the exit of senior employees, often triggered by some form of corporate change (merger, business transfer or reorganisation); or in lieu of engaging in a formal process to manage performance or other issues, which is often considered an unappealing option in relation to senior employees.
While it is a shock to be on the receiving end of a termination proposal, particularly if it comes out of the blue, our biggest tip is to spend the initial meeting at which the proposal is made listening rather than talking. Other than to request that the termination proposal be put in writing, you should not give a response to the severance offer during the meeting before you have had the chance to consider your position and take advice.
You can however ask for clarification of anything you are unclear about, including the reason for termination, as this might be relevant for assessing your position in relation to any good/bad leaver provisions in relation to share and other incentive schemes.
In order to consider the proposal being made, it is important to make sure that you have copies of your contract of employment and any other documentation that deals with any entitlements relevant to your employment. You will need these documents to pass to your legal (and possibly tax) advisers in order for them to advise you.
These might include:
It is important to take legal advice as soon as possible in order for you to understand what your potential legal entitlements might be, and be able to assess the adequacy of the deal being proposed and the strength of your bargaining position.
You will, in any event, be required to take legal advice on the terms and effect of any settlement agreement before you sign it. It is customary for the employer to contribute to the employee’s legal fees associated with this. It is important to note that such contribution is only normally payable if you accept the agreement.
In most cases, the first £30,000 of any termination payment can be paid free of tax. The main exceptions to this are any elements that represent payment in lieu of notice, earnings in return for work done or sums due to the employee under some other contractual obligation (e.g. payments made in relation to a bonus scheme).
There are some other limited ways that tax consequences can be reduced, one of which is to increase the employer’s contribution to the employee’s legal fees associated with seeking advice in relation to the settlement proposal, which provided the employer pays these directly to the lawyer, can generally be paid without tax consequences for the employee. While it is customary for employers to offer a contribution to the departing executive’s legal fees, the initial offer rarely covers the actual fees incurred. In the case of a termination payment which exceeds the £30K threshold, it is therefore much better to negotiate an increase in the employer’s contribution to your legal fees, rather than having to pay the balance yourself out of taxed income.
It is also worth considering whether there are any other elements of a package that might be valued by the departing executive but are of little or no cost to the employer and therefore generally easier to negotiate. These include:
Our final tip is not to take the employer’s decision personally. In many cases, the decision to exit a director or senior executive is a commercial one and even when it is not, the individual who can approach the settlement negotiation as a commercial exercise will often come out of it both mentally and financially better off!
This article should not be relied upon as a substitute for professional legal advice. If you are an employer seeking legal advice on a particular matter or employment circumstance, please contact Head of Employment and specialist settlement agreement solicitor Deborah West by emailing [email protected] or by completing the form below.
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