If your employer has offered you a settlement agreement, you’ll want to ensure the financial terms are fair. So, how much is a fair amount to ask for in a settlement agreement? Understanding this can help you make an informed decision about accepting or negotiating the compensation offer.
In this article, you’ll learn how to determine a fair settlement amount by evaluating your potential claims, calculating possible compensation, and considering additional factors like redundancy payments, notice pay, and other contractual benefits. We’ll also cover negotiation strategies to help you get the best possible outcome from your settlement agreement.
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How Much Should the Termination Payment Be?
Usually, the termination payment is the largest amount included in a settlement agreement. This payment can go by different names, such as:
- Compensation for loss of employment
- An ex-gratia sum
- An enhanced redundancy payment
No matter what it’s called, this payment serves as an incentive for signing the agreement, making it a key component of the settlement package. Importantly, the first £30,000 of this payment is generally tax-free, which can make it especially valuable.
Understanding how much this payment should be is crucial, as it directly reflects what you might otherwise be able to claim if you pursued a legal case against your employer. In the following sections, we’ll explore how to assess whether the termination payment amount offered is fair, given your circumstances.
How Do You Decide Whether Your Termination Payment is Fair?
When you sign a settlement agreement, you effectively give up your right to pursue any legal claims against your employer in the future. This is a significant decision, so it’s essential to ensure the termination payment offered is fair and adequately compensates you for that loss of right.
To determine if the termination payment offered in your settlement agreement is fair, you need to consider two critical questions:
- How much money would be awarded in compensation if you brought a successful claim against your employer?
Understanding the potential compensation amount is essential, as it provides a baseline for evaluating if the termination payment is sufficient. This could include compensation for unfair dismissal, discrimination, or other employment-related issues. - How likely is it that a claim would be successful?
The strength of your claim is equally important. Evaluating the likelihood of success helps you weigh the risk and benefits of accepting the settlement versus pursuing legal action. This depends on several factors, including evidence, the nature of your employment situation, and legal precedents.
By answering these questions, you can gain a clearer picture of the value of your potential claim and make a more informed decision regarding your settlement agreement.
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, as it depends on the specifics of your situation and the nature of the claim. However, the general principle is that compensation aims to put you back in the financial position you would have been in if you had not lost your job. In the context of an employment tribunal, this typically means calculating your lost earnings up until the point you secure new employment.
To estimate this, think about how long you are likely to be out of work. For instance, if your take-home earnings are £2,000 per month and you expect to be unemployed for six months, the compensation for an unfair dismissal claim might be:
£2,000 x 6 months = £12,000
However, keep in mind that the compensation calculation may vary if your claim involves discrimination or other factors. In discrimination cases, for example, you may also receive compensation for injury to feelings, which depends on the severity of the discrimination and its impact on you.
Remember to also account for other financial losses, such as missed bonuses, commissions, or loss of benefits like healthcare. Given these complexities, seeking professional legal advice is often advisable to get a precise estimate that accurately reflects your situation.
2. How likely is it that your claim will succeed?
The likelihood of success in an unfair dismissal claim depends on several factors, including the strength of your evidence, the circumstances surrounding your dismissal, and how your employer has behaved. Evidence such as written communications, witness statements, or records of any discriminatory behaviour can strengthen your case.
To illustrate how this works, let’s say your claim has a 70% chance of success. If the total compensation you could receive in a successful tribunal claim is £12,000, you can calculate a reasonable settlement value as follows:
70% x £12,000 = £8,400
If the amount your employer offers in the settlement agreement exceeds this value, accepting the settlement may be a better option, even if you believe you have a strong unfair dismissal claim. This calculation helps ensure that the settlement is a fair reflection of what you might realistically achieve through a tribunal, as well as accounting for the risk that your claim may fail.
Because each case is different, getting legal advice is highly recommended to help you understand your chances of success and to guide you in negotiating the best possible outcome.
Statutory Redundancy Payment
If you’re being offered a settlement agreement instead of redundancy, your employer will typically pay you at least the equivalent of a statutory redundancy payment. This amount is determined based on three factors:
- Your length of service: The number of complete years you’ve worked with your employer, which impacts the redundancy amount you are eligible for.
- Your age at the termination date: The calculation may vary depending on your age bracket, as older employees generally receive higher redundancy payments.
- Your rate of pay: This includes your average weekly earnings before tax, which forms the basis for the payment calculation.
You can use the government’s Redundancy Calculator to get an accurate figure tailored to your situation. Often, the statutory redundancy payment is included within the overall termination payment provided in the settlement agreement.
Payments Due Under Your Employment Contract
In addition to the termination payment, your employer is obligated to make certain payments as specified in your employment contract. These contractual entitlements must be accurately reflected in your settlement agreement to ensure you receive everything you’re entitled to upon termination. Make sure to thoroughly review your employment contract and verify that the following payments are included:
Salary and Benefits
It’s crucial to ensure that the settlement agreement explicitly states you will receive your normal salary and benefits up to your official termination date. While most agreements clearly outline salary payments, benefits can sometimes be less straightforward. For this reason, it’s important to verify that every benefit you are entitled to is clearly listed in the agreement to avoid any uncertainty.
Examples of benefits that should be confirmed include:
- Healthcare coverage: If you have access to private healthcare through your employment, confirm whether it will continue until the termination date or beyond.
- Pension contributions: Ensure that any contributions your employer makes to your pension scheme are included for the full duration of your employment.
- Company car or allowances: If you have a company car or other allowances (e.g., travel or meal allowances), check that these are covered up until your departure.
To ensure nothing is missed, compare the benefits listed in your settlement agreement against your latest payslip or benefits statement. Explicitly including these details helps prevent any misunderstandings and ensures that you receive your full entitlement. Seeking legal advice may also be beneficial to ensure no benefits are overlooked.”
These payments are essential and should be considered a minimum requirement in your settlement agreement. If you’re unsure about any of these entitlements, consulting a legal professional can help ensure that no contractual payments are overlooked.
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 haven’t taken all your holiday entitlement before the end of your employment, you are entitled to receive a payment for any unused days. Holiday entitlement generally accrues on a month-by-month basis throughout the holiday year. For example, if you leave halfway through the holiday year, you will have accrued half of your total annual leave entitlement. From this, you subtract the number of days you’ve already taken, leaving you with the remaining days that your employer must compensate you for when your employment ends.
For instance, if your annual leave entitlement is 24 days and you leave six months into the year, you would have accrued 12 days. If you’ve already taken 8 days, you should be paid for the remaining 4 days of unused holiday.
It’s essential to check your employment contract or your latest holiday balance report to confirm these details. Employers are legally required to pay for accrued but untaken holiday, so ensuring that this is accurately reflected in your settlement agreement is crucial.
Should a Settlement Agreement Include a Payment in Lieu of Notice?
Typically, if your employer is ending your employment, you are entitled to a notice period, the length of which should be specified in your employment contract. Legally, the minimum notice period is one week for each full year you’ve been employed, but your contract may outline a longer duration. It’s essential to verify this information in your contract to ensure your settlement agreement reflects the correct entitlement.
In some cases, you may not need to work through your notice period. Instead, your employer might offer a Payment in Lieu of Notice (PILON), where they compensate you for the earnings you would have received if you had worked during that time. It’s important to note that PILON payments are always taxable under current regulations, whereas they used to be tax-free. This means any PILON amount included in your settlement will be subject to tax deductions.
Alternatively, your employer may place you on garden leave, which means you remain employed and continue to receive your salary and benefits during the notice period, but you are not required to attend work. Employers often use garden leave to prevent employees from immediately joining competitors while still technically remaining on their payroll.
Whether you receive PILON or are placed on garden leave, ensuring that these terms are clearly outlined in your settlement agreement is crucial.
Additional Benefits and Payments in Your Settlement Agreement
Settlement agreements can include several other benefits and payments beyond the standard termination compensation. These additional components can significantly impact the overall value of your agreement. Below are some common elements you may encounter:
Outplacement Services
Many employers offer outplacement services as part of a settlement agreement to support employees in finding new employment. These services may include career counselling, resume writing assistance, interview coaching, or access to job search resources. The value of these services can vary, but they are generally included to help you transition smoothly into a new role.
Negotiating the scope or value of these services could be advantageous, as outplacement can be a valuable resource during a career transition. If your employer has offered such services, ensure that their value and details are explicitly stated in the agreement. You may be able to negotiate an increase in the value or duration of these services, especially if they are a standard part of your industry. The law allows payments for outplacement services to be made tax free.
Legal Costs
Employers often contribute to the legal costs of reviewing a settlement agreement, as the agreement is only legally binding if you have received independent legal advice. Your employer’s contribution should typically cover the total cost of this legal review, ensuring you receive the advice you need without incurring expenses.
You should confirm that the legal costs offered are sufficient to cover your solicitor’s fees. Make sure this amount is clearly outlined in your settlement agreement, as some employers may set a cap on the contribution. If the amount is insufficient, you can negotiate with your employer to increase it, ensuring you receive comprehensive legal advice.
Payment for Entering into Restrictive Covenants
Settlement agreements may also include restrictive covenants, which impose conditions on what you can do after your employment ends. These restrictions might prevent you from working for competitors, starting a competing business, poaching clients, or recruiting former colleagues for a set period. Employers use these covenants to protect their business interests, and they may offer a small payment as compensation for agreeing to these terms.
Typically, the payment for agreeing to restrictive covenants is a small, nominal sum, usually ranging between £50 and £250. This modest amount is intentional, as it helps demonstrate to HMRC that you have received specific compensation for agreeing to these restrictions, which are taxable. It’s important to ensure this payment is clearly documented; otherwise, HMRC might interpret your termination payment as a payment for accepting these covenants. If that happens, the entire amount could be subject to tax, potentially reducing the tax-free portion of your settlement.
Although it may seem negotiable, it’s usually not advantageous to focus on increasing this amount. Instead, focus your negotiation efforts on other aspects of the settlement, like the ex-gratia payment, which can be tax-free up to £30,000. It is also important to understand the implications of these covenants and to seek legal advice if you have concerns about how they might impact your future career plans.
Settlement Agreement Tax Rules
The amount of tax you’ll pay on a settlement agreement depends on the type of payment. In general, payments fall into two categories: contractual and non-contractual. Contractual payments, such as outstanding salary, holiday pay, or benefits owed up to the termination date, are fully taxable, meaning that any salary or accrued holiday included in your settlement agreement will be subject to income tax and National Insurance deductions.
However, non-contractual payments—those not specified in your employment contract, like an ex-gratia or termination payment—are tax-free up to £30,000. This tax-free allowance can be a significant benefit, allowing you to receive part of your settlement without additional tax liabilities. For example, if your termination payment is £25,000, you would receive the full amount tax-free. If it’s £35,000, the first £30,000 would be tax-free, and the remaining £5,000 would be taxable.
For further guidance, visit our comprehensive guide on tax for settlement agreements, which offers more details on how different payment types are taxed.
Can You Negotiate the Settlement Payment?
There is often room to negotiate the amount offered in a settlement agreement, and this can be done based on either legal grounds or goodwill. Legally, the amount you negotiate should reflect the strength of any potential claim you might have against your employer. For instance, if you have a strong case for unfair dismissal, you might negotiate for a higher settlement, as this would prevent a costly tribunal case for your employer.
On a goodwill basis, you can emphasize factors that might encourage your employer to offer a higher amount. Consider highlighting your loyalty to the company, any significant contributions you’ve made, or how difficult it may be for you to find a new job. These points may resonate with an employer who wants to provide fair compensation.
For more specific negotiation strategies, check out our detailed guide on negotiating a settlement agreement.
Find Out How Much You Should Get in Your Settlement Agreement
If you’ve received a settlement offer and want to ensure you’re getting a fair amount, we’re here to help. Our free consultation will provide personalised advice on maximising your settlement, assessing potential claims, and ensuring you understand all your entitlements. We advise clients throughout the UK on settlement agreements, from negotiation strategies to tax implications.
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Andrew Crisp is the Principal Solicitor at Mason Bullock Solicitors, where he specialises in employment law and dispute resolution. With over two decades of legal experience, Andrew has built a reputation for his expertise in advising employees on settlement agreements and helping clients navigate complex litigation processes, including the removal of County Court Judgments (CCJs).