This practical guide outlines when you would expect to get a settlement agreement, what it should contain and what key factors impact on how much you should get.
What is a settlement agreement?
A settlement agreement – once called a compromise agreement – is a legally binding document signed voluntarily by you and your employer in order to settle a dispute and any claims that you may have against them. You usually receive a financial payment and leave your employment. There are several examples of settlement agreements on our website.
When would a settlement agreement be used?
A settlement agreement would most commonly be negotiated in the circumstances below:
- to secure financial compensation for ill treatment at work without having to face the delays, stress and uncertainty of an employment tribunal
- to negotiate payment which is better than any statutory minimum (eg for notice period, holiday pay, redundancy pay).
- to obtain non-financial payments (eg an agreed reference, company car, private health insurance) included in your package.
- to make the most tax efficient use of a compensation payment.
- to get final legal closure to an employment dispute in the fastest possible time.
If you are thinking about negotiating your own settlement agreement, then have a look at our article on how to negotiate a settlement agreement.
What financial payments are included in settlement agreements?
The following financial payments would generally be included:
- Contractual payments up until the termination of employment
- Payment in lieu of notice
- Payment of a termination payment, including an ex gratia payment
- Arrangements regarding bonus payments / share schemes/ Long-term incentive plans (LTIPs)
- Additional sums as consideration for new clauses of confidentiality and/or post-termination restrictions
- All other statutory/contractual claims that might arise in an employment context.
What non-financial terms can be included in a settlement agreement?
The best non-financial term to include is probably an agreed reference: see our article on obtaining references from employers in settlement agreements.
Other terms which can be negotiated include: confidentiality clauses; clauses which expect you not to ‘bad-mouth’ or disparage your employer (you can ask for the same from them); garden leave; and keeping company property like a car or phone.
What is the average settlement agreement payout?
The amount you get is entirely dependent on your particular case, so there’s no average payout. However, in our experience:
- if you’ve been employed for over 2 years and
- if you have either been dismissed or forced to resign, and
- if you have the evidence to prove unfair dismissal or constructive dismissal,
then cases are likely to settle for between 1 and 4 months’ salary plus notice pay. (If the above doesn’t apply to you, don’t worry, you may still be able to negotiate a settlement agreement.)
There is no legal minimum settlement agreement payout either, although you wouldn’t get one unless your compensation payment justified the time and costs of drawing up and legally concluding the agreement.
There are some maximum awards made by employment tribunals, eg – for unfair dismissal. Employers are not bound to use the same maximum payments, but they do use them as guidelines when negotiating settlement agreements with employees.
How does a settlement agreement payment compare with an employment tribunal award?
If you take your claim to an employment tribunal, you have to consider all the inherent risks of losing the claim, the costs of hiring a lawyer, and the time and stress involved.
If you won a tribunal claim, the judge would award you an amount of money to compensate you for your lost wages whilst you tried to find another job. Finding another job could take anything from a few weeks to several months, or longer.
You would be taxed on any award received from a tribunal, whereas with a settlement agreement the first £30,000 can be tax free. So compensation of 6 months’ salary in an employment tribunal award might only look like 4 months’ net salary to you. Our advice in a scenario like this would be to settle for, say, 3 months’ tax free money, out of court, with a settlement agreement.
See our Helpful Guide below for articles on tax in settlement agreements.
Top TipsLorna Valcin
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How much should I get for a redundancy settlement agreement?
If the redundancy is genuine and the selection process is fair, then all you’re technically entitled to is the statutory minimum – see our article on redundancy – rather than any kind of enhanced or ‘ex gratia’ payment.
If the redundancy is unfair, or the selection process incorrect, then how much you should get would be similar to a dispute situation, as outlined below. You can also use our calculator to get a monetary estimate.
How much for a Dispute settlement?
In a dispute, there are many factors which combine to determine the settlement payment you should get.
For specific employment dispute situations, eg unfair dismissal, constructive dismissal, discrimination, our articles on those topics provide more details about financial payments and our settlement calculator will give you a fair estimate of the compensation you could get.
For dispute settlements generally, some of the most common factors which impact on your settlement payment include your age, employment status, annual income, bonuses and commission, whether you are disabled, on a disciplinary or being discriminated against, your notice period, length of employment and sick leave -amongst others which are all discussed further below.
Does my age affect my settlement payment amount?
If you are nearing retirement age then any claim could be of a much higher value because it could be harder for you to get another job, therefore your financial loss could be greater. This is especially true if your job is quite specialist and hard to come by. If you’re over retirement age however then you would potentially get awarded less because you were due to retire anyway.
If I have already left/got a new job, can I still get a settlement?
If you’ve already left then this is a serious blow to your chances of getting a decent settlement. There’s no need for them to pay you off to get rid of you. If you’ve already got another job this is pretty much the final nail in the settlement coffin because you can’t even claim that you have suffered any loss of income.
What difference does my annual income make?
Everything is based around your salary, because the more you earn, the higher your claim.
Can my bonuses or commission due be included in a settlement payout?
Often bonuses are discretionary rather than contractual, so we would normally try to negotiate at least that portion of your bonus which you can show should have been paid to you.
Commission is a different matter, because normally commission is contractual. If your employer disputed this figure, we might not insist on them paying all your commission, but most of it would be a good result.
Does being disabled affect my payment?
You could expect to receive more if you are disabled, because although you may normally be able to do your job properly, it is easier for employers to make your working life harder by failing to make reasonable adjustments, and it can be harder to get another job too.
If I’m facing a disciplinary is that a drawback?
If you are currently facing a disciplinary then generally you can expect less. This is because, regardless of the strength of your defence, your employer will undoubtedly try to blame you for the situation.
I’m the victim of discrimination, so do I get a higher payout?
Where you have suffered discrimination this looks bad for your employer so you should get more money, so long as you have sufficient evidence, ideally in the form of a witness and/or emails/similar. Discrimination in its various forms is very difficult to prove, so don’t expect a huge payout like ones you sometimes hear about in the media. See also our discrimination at work overview article
If I have submitted a grievance, does that affect my payment?
If you have recently submitted a grievance then your employer will often want to pay you off rather than spend time and money investigating your complaint. However, remember to see if you can short circuit this process by submitting a without prejudice letter first.
Does my notice period matter?
Normally we would negotiate for your notice period to be paid as a lump sum, and then ask for a couple of months’ money on top as a starting point, depending on the case. Of course if your notice period is very long, eg. 6 months, then you’re less likely to get anything on top of this, because an employment tribunal would normally only award a successful claimant enough money to tide them over until they find a new job. (See also our article on payment in lieu of notice.)
Is the size of my company/organisation significant?
The bigger and wealthier your company is, the more options they have should they wish to fight your claim – such as long drawn out investigations. However, bigger companies often prefer not to have legal battles with ex-employees and they don’t like bad publicity either.
Small companies on the other hand sometimes can’t afford to settle a case because they just don’t have the money in the bank. So the middle ground here is the sweet spot – the medium sized company.
Will I get more if I have worked for my current employer fo a long time?
You would tend to get more where you’ve worked for your employer for a long time because you’ve probably forged more loyalty there, and your knowledge about the company might be greater too, so things like handovers are more valuable.
If I am on a performance improvement plan (PIP) can I still get a settlement?
If you’ve been put on a performance improvement plan this can actually be a bit of a godsend. They’re going to have to pay your salary for the duration of the plan, so they might as well pay you that now just to get rid of you. Also all the wasted management time and potential legal fees too – why not suggest that they just pay you that now, to leave quietly?
Does working in the public sector have any impact?
In our experience, many public sector organisations have a policy of not negotiating with employees. This means that you have to sue them in the employment tribunal, which is not a problem for us, but it does make life more difficult for you.
What if I am on sick leave?
Being on sick leave can help to increase how much you should get, especially where you have lots of paid sick leave remaining. If there’s a dispute, it makes sense for your employer to pay you this money as a lump sum rather than keep you on the payroll but off sick.
If I have already issued an employment tribunal claim, can I still settle?
If you’ve issued an employment tribunal claim then it does make you look more serious about pursuing your claim and can encourage your employers to settle promptly. On the other hand you may have burnt some bridges, including any rapport with HR: your case has now gone up to the legal department, who sometimes think that they have to win every fight.
Does involvement in whistleblowing affect my chances of a settlement?
Whistleblowing is a tricky one! Companies, especially big ones, feel obliged to fully investigate, and of course to defend, any allegations of unlawful practice. If you have information about practices within the company such as fraud or malpractice, then they will often want to pay you a lump sum in exchange for you signing a confidentiality clause in a settlement agreement – the so-called gagging clause.
See our article about whistleblowing claims for more in-depth advice on what to do in such difficult circumstances.
Does having legal representation help?
If you approach your company with specialist lawyers on board, then you are likely to receive more money because your employer will realise that you are serious about your claim and that you might take them to an employment tribunal. In that case, they would also need to appoint lawyers themselves. They may instead prefer to pay you the money which they would have spent on legal fees.
Can I get a settlement agreement for a personal injury claim?
You may be able to negotiate a settlement agreement amount for personal injury. In employment situations, the most common types of personal injury are psychological injuries such as depression and similar. Financial awards for personal injury have no upper limit, but are closely aligned to the kind of injury that’s been suffered. They are notoriously hard to prove.
How do I ensure my settlement agreement is legally binding?
In order for a settlement agreement to be legally binding it needs to match certain legal criteria, which are quite complicated. But the actual document itself can be like one of the examples on our websitehere.
Then it needs to be reviewed and signed by your solicitor, who will also provide advice about whether the agreement is in your best interests. There is always a fee provided by the employer for this and we don’t ask you to pay any further money than the fee your employer pays. (see article on concluding a settlement agreement.)