Introduction to settlement agreements in financial services
Settlement agreements are common in the financial services sector. Many of the banks and other financial institutions frequently restructure and reduce headcount. Affected employees, on leaving the organisation, may well be offered an enhanced financial package provided that they agree to signing a settlement agreement. When presented with such an agreement, what do executives need to be aware of?
In a settlement agreement the employee waives their right to pursue employment claims. In turn the employer normally offers to pay the employee a termination payment. It is a requirement for the employee to obtain legal advice on the terms of the settlement agreement and, in particular, on their ability to pursue claims in the employment tribunal. This is so that the employee fully understands what is being waived.
Assessing the financial package
It is important to consider whether the employee has any potential claims and if so how strong the claims are and their value. These things need to be weighed up against the money which is being offered. Often the first £30,000 of any termination payment can be tax-free, although this is not always the case. One exception is that any payment relating to notice has to be taxable.
One potential claim could be unfair dismissal. Generally, an employee must have two years’ continuous employment to be able to bring an unfair dismissal claim. An employer must dismiss for a fair reason, such as redundancy, performance or misconduct and also follow a fair process.
If the employee is successful in pursuing an unfair dismissal claim the employee could receive a basic award calculated by reference to length of service and age, which is capped at £16,149. The employee could also receive a compensatory award, assessed on how long it will reasonably take for the employee to find another job (and the employee having a duty to look for other work). The maximum compensatory award is the lower of one years’ salary or £88,519.
It is therefore usually necessary to assess how long the employee is likely to be out of work and what the package being offered equates to in terms of loss of earnings going forward, also taking into account the overall cap.
There may be other potential claims to consider too, such as discrimination.
Depending on the particular case it may be appropriate to negotiate for a bigger package. Even when their is no real legal basis for asking for more money sometimes appealing to the employer’s good faith could result in an increase.
Garden leave and notice
Sometimes a clause in a financial services employment contract permits the employer to request that the employee stays away from the office during some or all of their notice period (garden leave) and not contact clients or employees. An employer may wish to place the employee on garden leave to protect their business interests, such as confidential information and client connections.
Alternatively an employer may wish an employee to work all or part of their notice, particularly if a handover is required.
Another option could be to pay the employee instead of all or part of their notice. A clause in the employment contract might state, for, example, that the employer has the discretion to pay the employee their basic salary only.
Most bonus awards in the financial sector tend to be discretionary. As well as stating that any bonus is discretionary, the employment contract will also often state that to be eligible to be considered for a bonus the employee must be employed and not under notice at the payment date for the bonus. Therefore if an employee, for example, is being being made redundant and served with notice before the payment date, the employer would not have to consider the employee for a bonus.
Again, even if there is no legal basis for requesting a bonus, it may be worthwhile appealing to the employer’s goodwill, particularly if the employee has worked the full bonus year and performed well.
Bonus awards may be deferred. This could be in the form of cash, shares or options. In redundancy cases, for instance, the employee may be treated as a good leaver under the relevant scheme and the awards could vest on the usual vesting dates or be accelerated.
Any bonus provision should be covered off in the settlement agreement.
Restrictive covenants in the employment contract could preclude the employee for a certain period from working for a competitor, soliciting or dealing with clients or poaching staff. A clause in the settlement agreement would usually state that the employee is still bound by the restrictions.
In certain cases the employer may be willing to waive or alter some or all of the restrictive covenants, particularly if the leaving employee will be posing little or no risk to the interests of the business. Any changes to the restrictions need to be reflected in the settlement agreement.
It is usual for settlement agreements to include a clause that the employee will not disclose the terms of the agreement and the circumstances of their departure to third parties. There has been recent criticism that these gagging clauses should be banned for preventing people being able to speak out about matters such as sexual harassment. Employees cannot, however, be prevented from reporting wrongdoing to regulators or the police.
Generally, employers in the financial sector tend only to provide factual references including job title and dates of employment.
However, in the case of Financial Conduct Authority (FCA) authorised firms hiring people carrying out “controlled functions”, there is a general duty on employers to provide relevant information to ensure that the person is fit and proper for the role.
Also, In the case of FCA authorised firms hiring people in senior management positions and “significant harm” functions under the certification regimes, there are more onerous obligations relating to requests and the provision of information. These obligations came into force on 7 March 2017.
It is common for the settlement agreement to refer to an obligation to provide a reference and the reference or reference template could be annexed to the agreement.
If you need any advice on a settlement agreement in financial services please do not hesitate to contact me on 0203 797 1264. I am able to arrange a face-to-face meeting or advise by telephone.