Publish date

12 October 2015

How to negotiate an employment exit package

What is involved in an employee managed exit and severance package?

An exit/severance package offer is usually made to the employee with the condition that they enter into a settlement agreement which will require them to give up all their legal rights to pursue their employer for a claim or claims in the Employment Tribunal, including any claim for contractual entitlement to notice pay, bonus, shares, commission, accrued holiday and settle any: unlawful deduction of wages claim, unfair dismissal and discrimination claims to name but a few.

What does an employee need to know before agreeing to an exit or severance package?

Notice, holiday and benefits

You will need to check whether their contract of employment has a notice of termination clause and whether the notice is less or more than their statutory notice entitlements?

They may have payment in lieu of notice (PILON) clause in their contract of employment. If they do, this may enable you to terminate the employment contract without notice, but pay them basic salary or perhaps (depending on how it is written) benefits value as well, instead in lieu of the notice entitlement; and having work on your premises or being placed on what is known as garden leave, where they are still employed but serving notice at home in a non- working capacity.

Why is this important?

If their contract does not contain a PILON clause then you can terminate their employment but will have to pay them the equivalent of what they have earned and received in benefits during the notice period. Or risk facing a breach of contract claim in the court if you do not. Known as a wrongful dismissal claim.

What about bonus and commission payments?

They may be entitled to receive all or part of any bonus or commission payments as part of the severance package. This is subject to the terms of their contract and being in employment at the time and not under notice of termination. Often employees will claim for the bonuses that they would have received had they worked their notice period. You need to check what the PLON clause says about that and what the bonus scheme rules say about eligibility for payment of bonuses.

Even in the event of a discretionary bonus arrangement, if the bonus has been paid out consistently in preceding years to people who have left who have met specific targets, there is a very good argument to say that the bonus should be paid.

What about shares and options?

If they have been given shares or options or participated in a share save scheme then how these are treated on the termination of your employment will be determined in most instances by the scheme rules. It is important to establish whether they are to be treated as a ‘good leaver’ because frequently there will be provisions that are beneficial if they have ‘good leaver’ status, such as the market value of the shares as opposed to the nominal or awarded value. Good leavers are usually those who have to retire due to ill-health or are made redundant or who have resigned because of the employer’s breach of contract (called constructive dismissal).

Do you have to pay compensation for loss of employment?

There are two types of compensation that they could be looking to be compensated for:
(a) Compensation based on length of service, age and the current statutory maximum weekly pay of £571; this is know as the basic award and is calculated in the same way as statutory redundancy pay up to a maximum of £17,130; and
(b) Compensation for loss of earnings.

You need to be mindful however that compensation for loss of employment for unfair dismissal is currently capped at £93,878 or a year’s loss of earnings whichever is the lower. So, if the employee’s annual salary is £65,000, the maximum they could hope to recover if they were to pursue a claim for unfair dismissal, would be £65,000 for loss of employment.

Could the compensation for loss of earnings be higher?

Yes, if they have been subjected to unlawful detriment for: asserting a statutory right e.g. health and safety right or for whistleblowing or discrimination for a protected characteristic such as age, sex, disability, race or other protected characteristics then the cap would not apply.

Ultimately your negotiating power around compensation for loss of earnings needs to focus on how long it will take for them to secure new employment. Against this you need to be pragmatic as there is a statutory obligation on them to mitigate their losses once their employment ends.

How do I conduct a managed exit?

The best way to proceed is with a protected conversation which is allowed under the Employment Rights Act 1996 under an amendment that was brought in in 2010, by the Lib Dem Conservative Coalition Government. The amendment works in this way, the employer has a protected conversation with the employee to suggest a managed exit on financial terms that would include notice and some form of reasonable compensation inducement to leave the organisation under a settlement agreement or through an ACAS form COT3.

The reason why it is protected is that if it is intended to settle the employee’s rights and there is no duress or improper pressure, then the employee cannot refer to the offer in any unfair dismissal claim in the employment tribunal, if the settlement negotiations break down. And if they do refer to the settlement offer the tribunal will disregard it. However, specialist advice is required if these conversations are to be conducted where the employee could bring discrimination claims instead of or in addition to unfair dismissal. Because the employee can refer to such a conversation or settlement offer.

If you would like to further discuss any of the information detailed above or have further questions about severance packages, please contact our Employment team on 01892 510000.

Heathervale House reception

Keep up to date with our newsletters and events