Settlement agreement: how much should you receive for your settlement agreement?

In this article one of our specialist employment solicitors, Chris Hadrill , provides a brief introduction on how much you should expect to receive for your work settlement agreement (or, to put it another way, what a reasonable value is for a settlement agreement).

If you’ve been offered a settlement agreement (also known as a compromise agreement) or are looking to approach your employer to negotiate a settlement agreement then you will normally have a number of questions: what payments should I expect under an agreement? How much is an average settlement agreement worth? And how much should you expect to receive for your settlement agreement?

Generally, when we’re considering how much a settlement agreement we’re looking at the ex-gratia (tax-free) value of compensation that you are being paid as compensation for the loss of your employment under your settlement agreement and we’re therefore looking at what can be negotiated  on top of  (i.e. in addition to) your minimum legal entitlements.

We’ll examine the following in this article:

  1. What are the standard payments you should expect under a reasonable settlement agreement?

  2. What is the average settlement agreement worth?

  3. Your settlement agreement: how much should you expect to get, based on your particular circumstances?

For an explanation of what a settlement agreement is please read our guide on settlement agreements

What are the standard payments you should expect under a reasonable settlement agreement?

What you should expect to receive under a reasonable settlement agreement will, to a certain extent, depend upon the situation that you are in (for example, you can only expect to receive a statutory redundancy payment if you are being made redundant and have more than two years’ continuous employment).

However, there are certain payments that you should almost always expect to receive under a settlement agreement:

  1. Contractual payments and/or statutory payments; and

  2. Compensation payments

Contractual payments and/or statutory payments

  1. Salary and benefits to the termination date

  2. Notice pay : you should be paid in respect of your notice period (whether this is being paid in lieu for your notice, serving it out, or being placed on garden leave)

  3. Accrued but untaken annual leave accrued to the termination date: you should receive a payment in lieu of any holiday days accrued but not taken to the termination date

  4. Contractual payments owed to you to the termination date (e.g. bonus, commission etc.) – your right to bonus and commission payments is dealt with below

  5. Payments for entering into new restrictive covenants, if applicable

Compensation payments

Compensation payment (also known as a “termination payment” or “ex gratia payment”) are sums of money that you receive as compensation for the termination of your employment. Such sums are normally paid to an employee under a contract known as a settlement agreement.

Please see our guide on ex-gratia payments for more details

The payment of a compensation payment is generally one of the main benefits of a settlement agreement, as employees can receive up to £30,000 tax-free in payments under such an agreement (if the sum is being paid as compensation for termination of employment).

The value of this sum will depend upon a variety of factors (for example, the industry you work in, the type of claims you may have, the strength of your clams, your seniority etc.) but, as a (very rough) rule of thumb you should normally expect to receive between two and three months’ gross salary as compensation for the termination of their employment.

Depending upon your seniority and the type of payments that you are contractually-entitled to the total settlement agreement payout that you could potentially expect could be large in nature (tens of thousands, or even hundreds of thousands of pounds).

Other types of payments

As well as the above payments, you can also usually expect to receive certain other forms of payment through a settlement agreement (dependent on your circumstances):

  • A contribution towards your legal costs (normally £500 plus VAT, but this can be in the thousands of pounds if you are a senior employee)

  • A contribution towards the cost of outplacement services

  • Coverage of training costs, in some circumstances

  • Coverage of relocation costs, in some circumstances (e.g. the cost of transporting your personal belongings, airplane tickets etc.)

Bonus payment

In order to qualify for a bonus payment you should normally have a contractual right (whether discretionary or not) to receive a bonus payment – this contractual right may be based upon an express verbal or written confirmation of your entitlement to a bonus (and generally how it will be calculated), or it may be implied by the employer’s conduct in similar situations.

Sometimes an employee may not have a reasonable expectation of receiving a bonus (because there has been no agreement to such and/or no custom and practice of paying a bonus) but the employer may be willing to pay a sum to the employee in respect of a bonus – this is unusual but, equally, it is a matter of commercial negotiation between the parties.

It’s always wise to check your contract of employment and correspondence with your employer to check what has been agreed regarding bonus terms.

Commission payment

If you are entitled to receive commission payments then your entitlement to such as well as the value of the commission payment you expect to receive should be recorded in the settlement agreement terms – a failure to include wording relating to such could preclude you from receiving such a payment if there is what is known as an ‘entire agreement’ clause in the settlement agreement.

As well as the payments listed above it is also generally a good idea to record in the settlement agreement all contractual rights and/or payments you expect to be able to exercise and/or receive upon termination of the contract of employment – for example, share options, long-term incentive plans, short-term incentive plans, and/or share schemes.

Including in the settlement agreement the terms under which such contractual rights may be exercised will provide certainty to the parties relating to the exercise of those rights and prevent potential misunderstandings at a later date.

It is almost always worth taking legal advice from a specialist employment law solicitor to check what you’re entitled to under your contract, so as to ensure that you’re receiving the correct financial payments and, further, to ensure that you receive proper advice on the tax on the settlement agreement.

Legal fees

Your employer will normally make a payment of legal fees for the advice that you have received on your matter, which will normally mean that there will be no cost to you for the advice that you have received. Your solicitor will normally send the invoice for their services to your employer for payment, marked in your name but payable by the employer.

What is the average settlement agreement worth?

The rough ‘rule of thumb’ that we generally use to determine the value of the average settlement agreement payout (in respect of compensation for termination of employment) is two to three months’ gross salary (in addition to your notice pay, holiday pay etc., as outlined above).

How much you should expect to receive in your particular case, for your particular settlement agreement may, however, differ very much from this. For example, if you have been subjected to a serious act of sexual harassment in the workplace then your case may be worth far more than the two to three months’ average outlined above.

What you should receive as financial compensation in respect of your particular settlement agreement, and whether you have been made a good settlement offer, is based on your circumstances and will depend upon your situation (as explained below). You should discuss your situation, and your particular employment dispute, with specialist settlement agreement solicitors in order to obtain expert advice on your matter.

Your work settlement agreement: how much should you expect to get, based on your particular circumstances?

In respect of the first question, the answer how much you should expect to receive obviously depends on what your circumstances are: if you have accepted voluntary redundancy then it is (generally) not possible to seek to negotiate the value; however, if you’re an employee being made compulsorily redundant (i.e. you’ve been told that you will be made redundant), and you’ve got more than two years’ continuous employment with your employer, then what we generally expect you to be offered an ex-gratia (tax-free) amount of an average of between one and three months’ gross salary as compensation for the loss of your employment (in addition to contractual payments, as above). Normally, the best-case scenario is that the compensation will amount to three to six months’ gross salary.

Generally, you will be in a stronger position to obtain a higher settlement if:

  • You have been employed for two or more years’ continuously;

  • You have been dismissed from your employment or resigned; and

  • You have evidence to show that you have been treated unreasonably (which could lead to a successful constructive dismissal claim) or have been unfairly dismissed

Read our guide on unfair dismissal here

Although it may be possible to roughly estimate what value of compensation is reasonable in redundancy (and other unfair dismissal situations), the situation becomes a bit more complicated if you have other types of claims (for example, if you have a ‘whistleblowing’ and/or discrimination claim).

In these circumstances the value of your claim (and therefore what settlement agreement payment you should expect) will depend on, among other things, what has happened – what detriments you are alleging you have suffered, how hurt you have been as a result of what has happened, whether your employer’s conduct has been (broadly) malicious in nature, and what loss of earnings you have suffered as a result of what has happened.

Broadly, the more serious the case and the longer it takes you to get a new job, the more valuable (in monetary terms) your case is. You should therefore seek legal representation in order to determine what a reasonable settlement agreement payout is in your circumstances (or, to put it another way, whether you have been offered an unreasonable settlement agreement).

If you have been offered a settlement compromise will generally be expected on your part by your employer, but you will also expect your employer to compromise.

Is there a minimum payment you can expect under a settlement agreement?

You should expect to receive under a settlement agreement, as a minimum, your notice pay, any accrued but untaken holiday, any other contractual sums that you are owed, and statutory redundancy pay (if you are being made redundant).

Are there maximum limits on compensation?

There are maximum compensation amounts that can be awarded by an Employment Tribunal in some claims such as, for example, breach of contract (where the value of the claim is limited to £25,000) and unfair dismissal claims (see our guide on unfair dismissal for more details).

Employers don’t necessarily have to use these maximum amounts when calculating what they’re going to offer to an employee under a settlement agreement, but they tend to use these amounts as a guide as to what the upper limit of payments should be (along with the custom and practice of what is generally paid for a settlement agreement, as above).

What can you expect to get under a settlement agreement as compared to an Employment Tribunal award?

It is generally the case that it is better to avoid legal action in the Employment Tribunal, if possible, due to the costs involved with doing so: the uncertainty as to whether you will win; the stress caused to you by bringing legal action; the legal costs that you will incur if you hire solicitors to deal with your Employment Tribunal claim; and the time it will take to bring the legal action to a conclusion. Settlement agreements are, therefore, generally a more favourable option for employees than legal action.

It’s difficult to express a general view on whether, in any individual’s particular circumstances, bringing an Employment Tribunal claim or agreeing to settlement agreement terms will give a more favourable outcome.

We therefore always recommend trying to settle your matter with your employer before issuing a claim in the Employment Tribunal; only if this is not possible should a claim be brought – legal action should almost always be the last resort, not the first action, and settlement discussions can help to resolve a dispute quickly and cost-efficiently.

There are various useful actions that you can generally take to try and leverage your potential claims in a settlement agreement, such as:

  1. Making a formal or informal verbal complaint to the appropriate person;

  2. Submitting a formal written grievance to your employer;

  3. Submitting a subject access request to them

Read more about our guidance on grievances here.

Should I get legal advice on the settlement that I have been given?

You will need to discuss with an employment solicitor what the value of a reasonable settlement agreement is in your particular circumstances, as it will be necessary to consider the particular factual background of your case, what potential Employment Tribunal claims you may have, and what your claims may be worth overall. Put shortly, although in this article we can give you rough guidance on what you should expect from an average settlement agreement, this may not apply in your particular case (it may be worth more or, equally, it may be worth less.