This practical guide outlines when you would expect to get a settlement agreement, what it should contain and what key factors affect how much you should get.
This guide covers:
- What is a settlement agreement?
- What are the benefits of settlement agreements?
- What financial payments are included in settlement agreements?
- What non-financial terms can be included in a settlement agreement?
- What’s an average settlement agreement payout?
- How does a settlement payment compare with a tribunal award?
- How much should you get for a redundancy settlement?
- What factors affect dispute settlement payouts?
- Can I get a settlement agreement for a personal injury claim?
- How do I ensure my settlement agreement is legally binding?
- Acas and settlement agreements
- Next steps
What is a settlement agreement?
A settlement agreement (once called a compromise agreement – see below) is a legally binding contract entered into voluntarily between you as an employee and your employer. When you sign the agreement, you relinquish your right to take to an employment tribunal any employment claims that you might have had against your employer.
The main advantage of a settlement agreement for you is that you can leave your employment on favourable terms. You can also get financial and other compensation for your employer’s mishandling of your case without the need for costly, stressful, and time-consuming legal action in an employment tribunal or other law court.
Shortly after you sign your agreement, you usually receive a financial payment and some other non-financial benefits (eg a work reference and sometimes more) and formally conclude your employment.
What’s in a name? Settlement or compromise agreement?
Settlement agreements were previously called ‘compromise agreements’. The name-change followed a consultation in 2013 when it was decided that the term ‘settlement’ was a more accurate description of the process: people didn’t want to be thought of as ‘compromising’.
You may sometimes still see/hear the old name being used. In practice, the two terms mean essentially the same thing.
There are several examples of settlement agreements on our website and you might also like to have a look at our guide on concluding a settlement agreement for what you need to do to finalise it or to get it ‘signed off’.
What are the benefits of settlement agreements?
The main benefits of settlement agreements are that they can be used:
- 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 included as part of your settlement package (see below for more detail)
- 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
- to make a clean break from work before it reaches a stressful and possibly unpleasant conclusion.
So, for example, if your employer has suggested you’re underperforming, instead of trying to prove otherwise, you could suggest ending the employment on agreed terms. Performance management is stressful for all concerned, therefore an employment settlement agreement may be beneficial for both the employer and employee.
If you are thinking about negotiating your own settlement, 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 in settlement agreements:
- Contractual payments up until the termination of employment
- Payment in lieu of notice
- 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 in a settlement agreement 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
- keeping company property like a car or phone
- keeping company-funded schemes like private health insurance.
What’s an average settlement agreement payout?
The amount you get is entirely dependent on your particular case, so averages aren’t all that useful. However, in our experience, if you have:
- been employed for over 2 years and
- either been dismissed or forced to resign, and
- 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 you have evidence of discrimination or whistleblowing, you may be able to get more, and the 2 years’ service requirement is less important.
If none of the above applies, you are in a weaker bargaining position, although sometimes a settlement is still possible.
Are there minimum settlement agreement payouts?
There are no legal minimum settlement agreement payouts. However, you’re unlikely to get compensation by way of a settlement agreement unless your employer (or former employer) is worried about the consequences of not settling – perhaps because of the risk of losing a tribunal claim or the stress and time of defending a claim.
Are there maximum compensation limits?
There are some maximum awards made by employment tribunals, in particular for unfair dismissal claims. Employers are not bound to use the same maximum payments, but they do use them as guidelines when negotiating settlement agreements with employees. These maximums don’t apply for certain claims, in particular discrimination or whistleblowing.
How does a settlement payment compare with a 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 win 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.
Basic awards for unfair dismissal claims
For an unfair dismissal claim, an employment tribunal would also make a “basic award”, as outlined in our main page on unfair dismissal settlements. If the basic award is high enough, it would be worth reflecting it in any settlement agreement payment.
Injury to feelings for discrimination claims
If the dispute related to discrimination, you would also get a payment for ‘injury to feelings’, which again should be reflected in your settlement payment. (See our page on discrimination for more about this and other related payments.)
Tax payable on compensation and awards
Note that whether you receive an award from an employment tribunal or agree to compensation, you may have to pay tax on at least part of it. How much you pay depends on what it relates to and the amount. For example:
- Unfair dismissal awards are tax free up to £30,000.
- Discrimination awards also include ‘injury to feelings’ which are normally tax free.
- But payments for unpaid wages or notice pay are always taxed.
If you’re still in your job, you can use any tax savings to your advantage in settlement agreement negotiations.
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How much should you get for a redundancy settlement?
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 it may be a sham redundancy and you may have a case for unfair dismissal. In those circumstances, 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.
What factors affect dispute settlement payouts?
In an employment law 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. Our settlement calculator will also give you a fair estimate of the compensation you could get.
For dispute settlements generally, some of the most common factors which influence how much you should get in your settlement payment include the following:
Age of employee
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.
Everything is based around your salary, because the more you earn, the higher your claim.
If you’ve already left your employment then this is a serious blow to your chances of getting a decent settlement. There’s no need for your (ex) employers 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.
Bonuses or commission due
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.
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. It can be harder to get another job too.
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.
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 in the workplace overview article.
Employment tribunal claim submitted
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 will now have gone up to the legal department, who sometimes think that they have to win every fight.
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.
Legal representation secured
If you approach your employer with specialist lawyers on board, then you are likely to receive more money. That’s because your employer will realise that you are taking legal advice, that you are serious about your claim and that you might well 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 otherwise have spent on legal fees.
Length of employment
You would tend to get more in your settlement agreement payment where you’ve worked for your employer for a long time because you’ve probably forged more loyalty there. Your knowledge about the company might be greater too, so things like handovers are more valuable.
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.)
Size of company/organisation
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 medium-sized company here is the sweet spot.
Performance improvement plan (PIP) in progress
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 money 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 in a settlement agreement and you will leave quietly?
Public sector organisations
In our experience, many public sector organisations have a policy of not negotiating with employees, and therefore if you work in such a public sector organisation, your chances of getting offered a settlement agreement are negligible.
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.
Being on sick leave can help to increase how much you should get in your settlement agreement, 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.
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.
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 website here.
Then it needs to be reviewed and signed by your solicitor, who will also provide you with independent legal advice about whether the agreement is in your best interests.
There is always a fee provided by the employer for this and Monaco Solicitors don’t ask you to pay any further money than the fee your employer pays. (see our article on concluding a settlement agreement.)
Acas and settlement agreements
If your employer refuses to negotiate with you, you may have no option but to take your claim to an employment tribunal. Before you do that, you have to inform Acas (the government-funded Arbitration, Conciliation and Advice Service) that that’s your intention.
One of their ‘conciliators’ will try to help you to reach a settlement so as to avoid a full employment tribunal hearing. (See our article on Employment tribunals: Commencing the Acas pre-claim process for more.)
If they succeed, they use their own form called a ‘COT3’ to record details of the settlement. The settlement is referred to variously as a ‘COT3 settlement’, or ‘Acas settlement’ or simply as a ‘COT3’.
Both a COT3 and an ordinary settlement agreement essentially serve the same purpose. However, there are some circumstances in which Acas helps both sides reach a settlement, but you and your employer decide to use lawyers and a regular settlement agreement instead of a COT3.
Remember that Acas is a neutral body, and not on either parties’ side. Their conciliators do their best to make sure there aren’t unexpected terms that act against you. But if you reach a settlement agreement with assistance from a lawyer, they’ll work to ensure that there definitely aren’t any unexpected terms in your employer’s favour.
If you have been badly treated at work and would like to leave, then your first goal is to negotiate a valid settlement agreement, including fair financial compensation for your ill-treatment. (We would only advise taking a claim to an employment tribunal as a last resort.)
Monaco Solicitors are experts at handling all aspects of settlement agreements. These range from advising you on the claims you might have, through negotiating an agreement on your behalf, to advising you on an agreement that you may have already been offered.
All our solicitors are senior employment law specialists with years of successful experience of handling settlement agreements.
We only represent employees, so we really do understand what your concerns are when you have been badly treated at work and how to help you get a fair settlement.
If you would like legal help with your settlement agreement, get in touch to find out if we can help. We look forward to hearing from you.
- Negotiating settlements
- Settlement agreement templates
- Concluding a settlement agreement: Guidance for employees
- Ex gratia payments
- Payment in lieu of notice
- Tax in settlement agreements
- Tax on pension payments
- Garden leave
- Share options
- Restrictive covenants
- Post-termination covenants
- Obtaining references