This letter agreement is intended for an Employer when they are parting ways amicably with an employee and want to pay the employee a sum of money as a goodwill gesture.
Normally an Employer would enter into a compromise agreement to ensure that a leaving employee will not bring a claim against the Employer. However, statutory obligations on the Employer are somewhat onerous when entering into a compromise agreement.
Please note that this letter agreement is intended for an amicable split only. However, if the employee subsequently brings a claim against the Employer, clause 4 of this letter agreement will not be binding, since any agreement to waive statutory rights will be void unless entered into via ACAS or after satisfying the statutory obligations relating to compromise agreements mentioned above. In this instance, it is also arguable whether any of the rest of the letter agreement remains binding. If in doubt, please seek legal advice.
1. This will be the date the employee leaves employment. For tax reasons, the employee should leave the employ and have a termination date pre-payment of any amounts of compensation.
2. All PAYE should end on the termination date. Payment in lieu of notice can be made if the employment contract allows for it. A payment for breach of notice may be able to be made if the contract does not allow for payment in lieu. Please take advice on this as it is a complex area of the law.
3. As above, this is where you outline the ex gratia amount to be paid to the employee. You can pay this in one lump sum or by instalments (if agreed). Statutory redundancy pay will be included in this clause and will be tax free.
4. Under tax law, the first £30,000 of this will be tax free. Either the employer can pay the balance after tax (and NI where appropriate) or the employee can be left to be liable for this under clause 5.
5. A standard clause that gives responsibility for any future tax arising to the employee. It looks onerous but is completely standard and if a genuine termination payment, should not be a problem. The employee will take legal advice from the independent adviser on this aspect.
6. Please note as above that this clause is probably not legally enforceable.
7. Whether to include post termination restrictions in the Compromise Agreement or not will depend on whether they are already agreed in an employment contract and/ or whether they are adequate. Separate consideration should be provided for any fresh covenants since payments for restrictive covenants are taxable in full and liable to NICs. If a specific sum is not carved out then HMRC may argue that the whole termination payment is consideration for the restrictive covenants and taxable in full. It is usually only around £100 (or can be less) and usually employers will reduce the compensation payment by this amount.