A settlement agreement can include much more than a financial payment, but the money is bound to be an essential factor for almost anyone about to lose their job.
How much should a termination payment be?
Usually, the most significant amount in a settlement agreement is the termination payment. This may also be referred to as:
- compensation for loss of employment
- an ex-gratia sum
- an enhanced redundancy payment
Whatever it’s called, it’s the payment your employer is paying you as an incentive for you to sign the settlement agreement. And the first £30,000 is usually tax-free.
So how do you decide whether a termination payment is fair?
Approach the question like this – by signing the settlement agreement, you give up your right to bring any claim against your employer. So, the best way to determine whether the offer is fair is to assess the value of any claim you may have.
How do you do that? Well, you need to ask two questions.
- Firstly, how much money would be awarded in compensation if you brought a successful claim against your employer?
- Secondly, how likely is it that a claim would be successful?
I’m not necessarily recommending that you pursue a claim – only that you calculate the value of a claim so that you can decide whether the amount they’re offering you is fair. There are several reasons why a settlement agreement may be a better option than an employment tribunal claim.
1. How much compensation would you receive in a successful employment tribunal claim?
Calculating compensation can be complex, but as a general principle, the purpose of compensation is to put you in the financial position you would have been in if you hadn’t lost your job.
This usually means your lost earnings up to the date you start another job. So think about how long you’re likely to be out of work. What will your lost income be over that period?
Suppose your earnings after tax are £2,000 per month, and you expect to be out of work for six months. In an unfair dismissal claim, an employment tribunal would award you
£2,000 x 6 months = £12,000
Your compensation is usually limited to financial losses in an unfair dismissal claim.
However, if you’ve been the victim of discrimination, you may also be able to claim compensation for injury to feelings. The amount will depend on how severe the discrimination was and its impact on you.
2. How likely is it that your claim will succeed?
The strength of an unfair dismissal claim depends on several factors, and you should seek legal advice on this.
But let’s say that your claim has a 70% chance of success, and the amount you would recover in compensation is £12,000. This would suggest that a reasonable settlement would be
70% x £12,000 = £8,400
If the offer in the settlement agreement is more than that, you would be better off accepting the settlement agreement, even if you have a strong claim.
Statutory Redundancy Payment
If you’re being offered a settlement agreement as an alternative to redundancy, your employer will usually pay you at least the equivalent of a statutory redundancy payment. The amount is calculated by reference to:
- Your length of service
- Your age at the termination date
- Your rate of pay
For details of how to calculate this, have a look at the government’s redundancy calculator.
Often the statutory redundancy payment is included within the termination payment.
Payments due under your employment contract
In addition to the termination payment, there are certain payments your employer must make to you. These payments are set out in your employment contract.
Look at your employment contract and ensure all the payments are included in your settlement agreement. These payments include:
Salary and Benefits
You should ensure that the settlement agreement clarifies that you will receive your normal salary and benefits up to the termination date.
Whilst nearly all settlement agreements explicitly state that the employee will receive their salary, the position with benefits is sometimes less clear. Therefore, we recommend that this be included explicitly to avoid doubt.
Some benefits may be extended beyond the termination date. For example:
- You may agree on healthcare cover until a set date in the future. This benefit is high value to you but probably doesn’t cost the employer very much.
- If you’re receiving a payment in lieu of notice, you may agree with your employer that you can continue to use the company car until the end of what would have been your notice period.
Payment for Accrued but Untaken Holiday
If you do not take all your holiday before the end of your employment, you should receive a payment for any unused days.
Holiday entitlement accrues on a month-by-month basis. For example, if you leave halfway through the holiday year, you will have accrued only half your holiday. Deduct from that the amount of holiday you have taken, and you’re left with the number of days for which you should be paid when your employment ends.
For more information, you may want to read this article about holiday entitlement.
You’re usually entitled to notice if your employer is ending your employment. The length of that notice period should be stated in your contract. The minimum amount of notice is one week for every full year you’ve been employed, although the contract may stipulate a longer notice period.
You may not have to work your notice period. Instead, your employer may decide to make a payment representing the amount you would have earned during your notice period.
This is known as a payment in lieu of notice, commonly abbreviated to “PILON”.
The law used to allow you to receive a PILON tax-free, but this has changed, and a PILON will always be taxable.
Instead of paying you a PILON, your employer may place you on ‘garden leave’, which means you remain employed for your notice period,, but you don’t have to attend work.
A retention bonus is a payment conditional upon remaining employed until a certain date.
This is useful for an employer who wants to ensure sufficient staff are available to complete a particular project, such as closing a depot or finishing a contract.
A retention bonus will usually be taxable.
Many employers will provide their staff with counselling and training to help them find alternative work. This is known as outplacement services.
Often a settlement agreement will include the provision of outplacement services up to a certain value. The amount may be open to negotiation.
The employer will usually contribute towards the employee’s costs of obtaining legal advice on the settlement agreement.
This is because a settlement agreement is only legally binding if the employee has legal advice. It’s in the employer’s interests to ensure that the employee receives that advice. Otherwise, the settlement agreement will be of no effect.
The contribution to legal costs will often cover your solicitor’s fee in full, which means there’s no charge to you.
Most employment solicitors also offer a free initial consultation on a settlement agreement.
Payment for Entering into Restrictive Covenants
Employers will often make an additional payment in exchange for the employee agreeing to enter into covenants which restrict what they can do after they leave.
These may include restrictions against:
- working for a competitor
- setting up a competing business
- poaching customers or staff
- interfering with suppliers.
The payment is usually a nominal payment, somewhere between £50 and £250.
We don’t recommend negotiating the amount of this payment because it is taxable. If you want to negotiate, you should do so in respect of the ex-gratia payment, which is tax-free.
What about tax?
The amount of tax payable on a settlement agreement depends on the type of payment.
As a general rule, contractual payments such as salary and benefits are taxable. Non-contractual sums such as termination payments are tax-free, up to £30,000.
For more information about the various payments’ tax status, look at this article.
Can you negotiate how much you get?
There is often scope for negotiating how much you will receive in a settlement agreement.
This can be done on a legal basis or a goodwill basis.
For example, by signing the agreement, you’re waiving your right to bring any kind of claim against your employer. The amount you’re offered should reflect the value of that right. If you can argue that you would have a legal right to more money if you claimed unfair dismissal, this may be an incentive for your employer to pay you more.
On the other hand, if you’re already getting more than you’re entitled to, there’s no point in appealing your legal rights. You may, however be able to negotiate on the basis of goodwill. You can appeal to your employer on the basis of:
- how loyal you’ve been to the business,
- the contribution you’ve made and
- how difficult it will be to find another job.
These are factors a tribunal wouldn’t consider but may be relevant in helping to persuade an employer with a conscience!
Take some time to think about the best tactics for negotiating the best deal on your settlement agreement.
Contact us to find out how much you should get in your settlement agreement
If you have received a settlement and you’d like to find out more about how much you should expect to receive, contact us for a free consultation.
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