Settlement agreements: 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 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 or are looking to approach your employer to negotiate a settlement agreement then one of the first questions you will undoubtedly ask yourself is: “how much is an average settlement agreement worth?”. 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 (to put it another way, we’re assuming for the purposes of this article that you’re going to be paid your minimum legal entitlements (notice pay, holiday etc.) under your settlement agreement and we’re therefore looking at what can be negotiated on top of your minimum legal entitlements.
We’ll examine the following in this article:
- What is a settlement agreement?
- What are the standard terms you should expect under a reasonable settlement agreement?
- What is the average settlement agreement worth?
- Your settlement agreement: how much should you expect to get, based on your particular circumstances?
- What should you do if you think that the terms of the settlement agreement are unfair?
- Do you have to sign your settlement agreement or should you negotiate it?
- Tips and tactics for improving how much you can get for your settlement agreement
- How can Redmans help you with your settlement agreement?
What is a settlement agreement?
Settlement agreements are, generally, a written agreement to provide an employee (or worker) with benefits (e.g. a payment of compensation, a reference, sometimes an apology) in return for the employee’s agreement that they will waive their right to bring such claims, or withdraw them if they have already issued a claim.
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 I would almost always expect employees to receive under their settlement agreements:
- Salary and benefits to the termination date
- 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)
- 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
- Contractual sums owed to you to the termination date (e.g. bonus, commission etc.) – your right to bonus and commission payments is dealt with below
- Compensation for the termination of your employment: you will almost always receive a sum of money as compensation for the termination of your employment under a settlement agreement (also known as an ‘ex-gratia payment‘. The value of this sum will depend upon a variety of factors (for example, the industry you work in, the strength of your clams, your seniority etc.) but, as a (very rough) rule of thumb I would normally expect for an employee to receive between two and three months’ gross salary as compensation for the termination of their employment
- Payments for entering into new restrictive covenants, if applicable
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.)
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.
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.
What is the average settlement agreement worth?
The rough ‘rule of thumb’ that we generally use to determine the value of a reasonable settlement agreement (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 in respect of your particular settlement agreement, based on your circumstances, will depend upon your situation (as explained below).
Further reading: read our guide to settlement agreements
Your settlement agreement: how much should you expect to get, based on your particular circumstances?
In respect of the first question, the answer to this will obviously depend 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 tend to expect you to be offered as the ex-gratia (tax-free) amount is a sum of between one and three months’ gross salary as compensation for the loss of your employment (in addition to your notice pay, holiday pay, statutory redundancy pay (and any bonus, commission etc. if relevant)). The reason for this valuation is that the ex-gratia amount in a redundancy situation is normally principally based upon the loss of earnings (if any) that you will suffer as a result of the termination of your employment.
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 will depend on, among other things, what has happened (i.e. 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 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.
What should you do if you think that the terms of the settlement agreement are unfair?
If you think that the terms of the settlement agreement that you have been offered are unfair then the normal appropriate course of action is to negotiate the terms of the agreement: you can either do this yourself or you can instruct a solicitor to do it for you.
I would always recommend that, prior to instructing a solicitor, you have a thorough initial assessment of your matter and your settlement agreement undertaken – firms of solicitors normally will do an initial consultation on your settlement agreement worth for no charge. It therefore won’t cost you anything to have a preliminary assessment done of whether you are being offered a reasonable settlement agreement or not.
Do you have to sign your settlement agreement or can your negotiate it?
You certainly don’t have to sign your settlement agreement as it is and it is often (although not always) advisable that you push your employer (gently) to see how much you can potentially obtain from the negotiations. If you wish to negotiate your agreement then this can be done by one of two ways: you can either do it yourself or, alternatively, instruct a third party (such as a specialist employment solicitor) to do this for you. Which approach is best in the circumstances really depends upon a number of factors, such as the nature of your potential claims, whether you still have a good relationship with the management of the business, and whether you feel confident in doing so (among other things).
Tips and tactics for improving how much you can get for your settlement agreement
If you’re looking to negotiate your settlement agreement with your employer (or are looking to instruct a solicitor to do so for you), there are a number of helpful tactics and tips which might help you to get what you want. These include:
- Instructing a specialist solicitor to negotiate you or advise you on your claims – your employer will generally cover part – if not the whole – of the cost of doing so
- Research your potential claims and determine where your leverage is – if you look like you don’t know what you’re doing then your employer will take advantage of this
- Be aware that you potentially have a £30,000 tax-free allowance for your settlement agreement (depending upon the type of claims that are being settled) – take advantage of this if you can
- Bear in mind that there is a three months less one day limitation period for Employment Tribunal claims – if you miss this then you lose a great part of your leverage
- Employers often play ‘hard ball’ – don’t be intimidated if you get an aggressive response
- If you make a ‘counter-offer’ to your employer’s offer of the settlement agreement then your employer is entitled (potentially) to withdraw from negotiations – this isn’t likely but bear it in mind as a possibility
How can Redmans help you with your settlement agreement?
It is always advisable to get expert legal advice from an experienced specialist employment solicitor on your case, for two reasons:
- In certain situations (particularly where you believe that you’ve been discriminated against, harassed, victimized or penalised due to ‘blowing the whistle’) your case may be complex and it may be difficult for you to untangle the various points of law – a specialist employment solicitor will be able to quickly analyse your case and provide you with the relevant advice; and
- Your employer will normally pay for most, if not all, of the cost of this advice.
As a final point, and this ties in with all of the above, you must have a reasonable and realistic expectation as to what’s achievable in settlement agreement negotiations: Employment Tribunal cases are generally not worth millions of pounds (although there are exceptions) and your employer (or their legal representatives) will generally be experienced in these types of negotiations and have a set view on what level of payments are appropriate – however, it’s your solicitor’s job to let you know what they think your case is worth and to do their best to achieve what you want.