Settlement Agreements, Compromise Agreements & How Much You Should Get
‘How much should I get in my settlement agreement (or compromise agreement)?’ is probably the question we get asked the most. You might also want to try our settlement agreement calculator, and read our article on how to negotiate a settlement agreement too. Below we briefly introduce settlement agreements, then explain how much you should get, then we set out what to look for in the settlement agreement document itself.
What is a settlement agreement?
A settlement agreement (sometimes also called a compromise agreement) states that in return for a payment, you give up your right to bring claims against your employer at the employment tribunal or in the courts.
Such agreements are individual contracts between you and your employer. Their content is not set in stone and there is absolutely no standard way to do them. There are certain minimum contents set out by statute, such as it must be in writing and signed by an independent adviser, but the money element is often open to negotiation.
Your independent adviser – who will usually be a lawyer – must also explain the agreement to you. This is so that you fully understand exactly what you are signing. A good lawyer will also be able to answer any questions you might have and give you advice on the terms of your agreement. You usually pay nothing for advice from a lawyer on the agreement, because it’s standard for employers to pay the legal fee of having the document signed.
However, if your lawyer assesses that your agreement should be offering you more, they will explain this to you and offer to negotiate with your employer on your behalf. This additional service would require you to pay a separate fee. Many law firms offer a form of ‘no win no fee’ whereby the fee is a small percentage of the increase the lawyer achieves for you over and above the amount your employer originally offered.
We see thousands of settlement agreements and can tell you whether yours contains any unusual clauses in the small print, or doesn’t maximize potential benefits to you. If anything in your agreement seems strange or unfair to you, don’t be afraid to ask questions and check what could be done as part of the initial assessment.
At Monaco Solicitors, we believe in going through all the possible outcomes with you in detail, all as part of the service.
When you should get 1 to 4 months’ salary plus notice pay
Assuming that you have been employed for over 2 years, that you have either been dismissed or forced to resign, and that you have the evidence to prove that the dismissal, or constructive dismissal, was unfair, then we would expect most cases to settle for between 1 and 4 months’ salary plus notice pay. If you don’t fit into these criteria don’t worry, you can still negotiate an exit package, also known as a settlement agreement (formerly called a compromise agreement).
Why do we say 1 to 4 months’ money plus notice pay? Well, think about what you would get if you managed to win an employment tribunal claim. A judge would award you an amount of money to compensate you for your lost wages whilst you tried to find another job. For most people in the UK, getting a job would take a few months at most. If you were out of work for a longer period of time, like 6 months or more, then you would need to have a good reason for not finding work in that time. For example you might be a very specific specialist in your field or your type of job might be becoming increasingly rare.
You would need to produce detailed evidence of your job hunt in order to prove that no jobs were available, so on that basis, the maximum which you’re likely to receive in a tribunal is 6 months’ wages.It is also worth noting that you would also be taxed on any award received after a tribunal, unlike with a settlement agreement whereby the first £30,000 tends to be tax free, so an employment tribunal award might only look like 4 months’ wages net to you. So if you would only get 4 months wages at a tribunal, with all the inherent risks of losing, and the costs of hiring a lawyer, then it surely follows that you would accept say 2 months’ money out of court.
Factors to take into account
Some of the other factors which influence how much you should get are as follows:
- Witnesses – Do you have any colleagues who would be prepared to back you up?
- Evidence – What is the strength of your evidence – maybe some emails, or even recordings of
- Income – The more you earn, the more they need to pay you.
- Length of service – The longer you’ve been there the more goodwill you’ve built up.
- Mistreatment – How bad was/is it?
- Representation – Do you have professional legal representation?
- Psychology – Can you keep calm under pressure and make the right moves?
- Employer – Do they have lots of money, or, conversely, cash-flow problems?
- Determination – Does your employer believe you might take them to tribunal?
- Tax status – Can you structure the deal to save both sides tax?
Top 3 Tips
- Try our Settlement Agreement Calculator;
- Be prepared to fight if you want more; and
- Get legal representation, evidence and witnesses.
Disputes & how much for your settlement agreement
Everything is based around your salary, because, as with much of life, the more you earn, the more you get paid. It does make sense according to the employment tribunal awards in this country, because in constructive / unfair dismissal cases, a tribunal would only tend to award a successful claimant with an amount of money equivalent to that which they lost whilst in between jobs.
Bonuses & commission
Often bonuses are discretionary and difficult to argue that you were contractually entitled to, so we would normally try to negotiate a portion of your bonus which you can show should have paid to you. Commission is a different matter though because normally commission is contractual. Let’s face it they will probably find some way to dispute the figure, right? So we wouldn’t normally insist on them paying all your commission, but most of it would be a good result.
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 economic loss could be greater. This is especially true if your job is quite specialist and hard to come by anyway. If you’re over retirement age however then you would potentially get awarded less because you were due to retire anyway.
Number of years worked for current employer
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 level of knowledge about the company might be greater too, so things like handovers are more valuable. Also you might know where all the so-called ‘bodies are buried’ in terms of any questionable practices which they want to stay confidential.
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, like 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.
Number of employees
The bigger your company is the more money they have to spend. Furthermore, bigger companies often prefer not to have legal battles going on with ex-employees and they don’t like bad publicity either. However, employees often think that their dispute would attract media attention when in fact it wouldn’t: believe it or not, our media don’t like to portray big business in a bad light. However, although bigger companies tend to want to settle cases more, they have more red tape and approvals to get, and they also have more options should they wish to fight – like long drawn out investigations for example. 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.
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.
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.
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. Discrimination in its various forms is discussed further in our discrimination overview article, but it is very difficult to prove, so don’t expect a huge payout like you may have heard about in the media.
If you have 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.
Already left or just started a new job
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 is there? 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.
If you’ve issued a tribunal claim then it does make you look more serious. On the other hand you may have burnt some bridges, including any rapport with HR, and your case has now gone up to the legal department, and sometimes legal think that they have to win every fight.
You could expect to receive more if you are disabled, because although you are normally able to do your job properly, it is easier for them to make your working life harder by failing to make reasonable adjustments,, and it can be harder to get another job too.
It’s a tricky one is whistleblowing! 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.
But to counterbalance that, what if word gets out and you go to the press anyway? Then they’ve made it look worse for themselves by paying you to keep your mouth shut. Certainly you can make subtle hints about exposure, or keep them verbal, and use that to leverage a good deal. See our article about whistleblowing claims for a more in-depth discussion of what to do in such difficult circumstances.
If you’ve been put on a performance improvement plan this can actually be a bit of a godsend. Think about it – 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. (Don’t forget to negotiate an agreed reference too!)
In our experience, many public sector organisations have a policy that they won’t negotiate with employees. This means that you have to sue them in the Employment Tribunal, which is fine, but it does make life more difficult.
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 might take them to tribunal and that they should take you seriously. Furthermore they will also need to get ‘lawyered up’ themselves, and they may instead prefer to pay you the money which they would have spent on legal fees, so long as your opening offer is within a reasonable range.
How much a tribunal would award
This largely depends on whether you get another job quickly or not, as your losses are based on your actual financial loss from being out of work. There are 2 main elements in a tribunal award for unfair or constructive dismissal, being the compensatory award and the basic award.
There is a statutory cap on the ‘compensatory award’ in unfair dismissal (including constructive unfair dismissal) claims which is the lower of £80,541 or 12 months’ gross pay (as at February 2018). So, if your gross yearly pay is higher than this amount you can’t get any more at tribunal. If your gross yearly pay is less than this, the maximum award for unfair or constructive unfair dismissal is is one year’s pay.
The basic award is calculated like a statutory redundancy pay – a week’s pay or £489 (as at February 2018), whichever is lower, for every year of service with an adjustment for an age factor if you are over 41. The second is a compensatory award. This is calculated with reference to how much you have lost. All claimants have a duty to mitigate their loss: you must try to find alternative work at the same, or higher, salary. The tribunal will factor in your salary from your new job and your attempts to mitigate your losses into the compensatory award.
There is a £25,000 limit for breach of contract claims such as not being paid your notice period or wages or for share options. For this reason, senior executives will need to consider High Court action, where there is no limit, or preferably just the threat of High Court action (because no one wants to go to court at all, never mind the High Court – frankly its a bit scary!).
For discrimination claims or detriments due to whistleblowing you can also claim compensation in the same way as for unfair dismissal if you have lost your job as a result of it.
However, there is no upper limit to the award for compensation. you may also be awarded an amount for ‘injury to feelings’ that reflects how serious the discrimination was (which can vary from around £500 to £30,000). The most common award is towards the lower end of this scale, being around £500-£5,000. It’s rare to see the higher end being awarded by judges.
Personal injury claims:
You may be able to negotiate a settlement agreement / compromise agreement amount for personal injury. In employment situations, the most common types of personal injury are psychological injuries such as depression and similar. Compensation is theoretically unlimited but in practice it’s tightly pegged to the type of injury caused It’s also very difficult to prove, as you have to show that the employer’s conduct was the only cause of your condition, and that they knew that their actions could lead to injuring you.
Redundancy & how much for settlement agreements
If the redundancy is genuine and the selection process is fair, then all you’re technically entitled to is the statutory minimum (see our redundancy article) rather than any kind of enhanced or ‘ex gratia’ payment.
This applies if there is a genuine economic reason for the redundancy, for example if there are a number of people being made redundant and there is an objective selection process (like a whole department is going).
Even in these situations you can potentially volunteer to leave before the consultation, and ask your employer to pay you an amount in a settlement agreement / compromise agreement equivalent to how much you would have earned had you stayed employed and dragged out the consultation process.
In practice however, employers will offer more than the minimum amount in the form of a settlement agreement, in order to facilitate your smooth exit, and paper over the cracks in their selection process. (You can read more here about negotiating your redundancy package.)
If the redundancy is a complete sham, for example where your employer has fudged the results for personal reasons, then how much you should get will be similar to a dispute situation, as set out below. In that situation you should write to request information about the process, like whether you have been placed in a ‘pool’ for comparison with other colleagues, and if so, who the other colleagues in the pool are, and what are the selection criteria for deciding which
employee is made redundant.
If you’ve not been placed in a pool then ask what the business reason for selecting you is, and point out that there are other people who should have been placed in a pool with you based on their job function. You could put these points into a written grievance and submit it to your employer during the redundancy process, or you may have a right of appeal against your redundancy which you could invoke here.
How much you should get in your settlement agreement / compromise agreement can depend on the strength of your evidence. One powerful type of evidence, which is also very rare, is witness evidence. If you are lucky enough to have a witness at work willing to stand up for you, then we suggest that you ask them to sign a written statement quickly, before they change their minds! Obviously it’s a risky business being a witness for a colleague against your employer, and for this reason it is unusual to have any witnesses at all. After witnesses, written evidence is the most important type and audio evidence can also sometimes be useful. Read all about evidence and how to collect it safely in our evidence section.
Compromise agreements how much
You might have heard the words ‘compromise agreement’ and be wondering how these differ to settlement agreements. Well, don’t worry because they don’t differ at all. The old name for these things was compromise agreements and then the government changed the name in around 2013 to settlement agreements. This was just a kind of branding exercise rather than changing any of the law at all. They just thought that it sounded better, because no one would think that they had to ‘compromise.’
How do I make sure a settlement agreement is legally binding
In order for a settlement agreement to be legally binding it needs to match certain criteria, which are quite complicated. But the actual document itself can be one of the templates which we give away on our website here. And then it needs to be signed by your solicitor. There is always a fee provided by the employer for this. When we review and sign settlement agreements, we don’t ask you to pay any further money than the fee your employer pays.
What non-financial terms can be included in a settlement agreement / compromise agreement?
The best other term to include is an agreed reference. Apart from that, there are lots of different terms which can be included – because these things are a negotiation, rather than being set in stone, there is no real standard way of doing it. But most settlement agreement documents include confidentiality clauses; some have garden leave; some even let you keep company property like a car or a phone.
You might also want to read:
WHAT TO LOOK OUT FOR IN THE SETTLEMENT AGREEMENT DOCUMENT ITSELF
Termination payments: when and how?
Your agreement should clearly state how and when the payment(s) will be made and when your employment will end. Payment dates are normally around 14 to 28 days after signing the agreement or after your last day of employment, whichever is the latest.
Some organisations tend to process payments in the relevant monthly payroll. We would generally try to ensure a shorter payment date and in some cases we’ve succeeded in getting payment from an employer within 24 hours of signing, but anything up to a month is standard.
A good adviser will ensure that the payment mechanism is stipulated within the agreement itself, in terms of both the payment date and also any payment method you prefer if it’s not the bank account into which your salary is paid.
Some payments are pretty obvious and straightforward, while others are less so and we discuss some of both in the following checklists .
Settlement payments checklist
Check your agreement for all of the following:
- All outstanding salary
- Any expenses owed
- Your contractual notice or statutory notice if that is greater
- Holiday pay
- Car allowance
- Bonus payments
- Pension payments
Consider non cash benefits:
- Company car
- Health insurance and life insurance, is there the option for these to continue?
What deductions, if any, will be made, for example:
- Some employers ask for contractual maternity pay to be repaid if you leave before a specified amount of time has passed after your return to work (normally around six months).
- Do you have a season ticket loan or any other loans with your employer?
- Have you taken more leave days than you will have accrued at the end of your employment?
Taxation of settlement agreements
Employers usually ask for one of these and they are a very standard clause in nearly all settlement agreements. The way they read is that if, after the agreement is signed, HMRC deem that tax is due on a payment made to you, they will look to your employer to pay this tax. The indemnity means that you have promised to pay this money back to your employer and if you don’t pay, your employer can sue you for this money. In practice however these are extremely rarely used – hardly ever in fact. So they are not something which you should worry about.
What can usually be paid free of tax (‘gross’) ?
The following payments can generally be paid tax free:
- Compensation for loss of employment up to £30,000 (over and above any monies paid in respect of the notice period)
- Payment of legal costs
- A payment for injury to feelings caused by discrimination or personal injury during your employment
- Payment for outplacement services
- Payment made into a pension scheme
Although it was previously possible to pay notice pay tax free, for terminations after 6 April 2018, all notice pay is taxable. Where you are not employed for some or all of your notice period, the £30,000 tax free limit only applies to the portion of any settlement payment which exceeds the amount of income you would have received if you had been employed for the entirety your notice period. The portion equivalent to what you would have received, if you had been employed for your notice period, is taxed.
What payments are taxable?
- Holiday pay
- Compensation for loss of employment over £30,000
- A payment in lieu of notice or other payment equivalent to any period of notice not worked
- A payment for a restrictive covenant
Tax on salary and benefits
Salary and benefits payments made until the last day of your employment are subject to tax and national insurance (NI).
Tax on payment in lieu of holiday
If you have unused holidays, your employer is required to pay you in lieu of these and this payment would attract tax and NI as usual.
Tax on ex gratia payments up to £30,000
Ex gratia payments are generally exempt from tax for the first £30,000.00 .
Tax on ex gratia payment exceeding £30,000
If your settlement agreement includes compensation in excess of £30,000.00, the excess is subject to income tax and national insurance contributions. To work out how much tax would be applicable, see our article on calculating settlement agreement tax.
If your employer wants you to enter into new restrictive covenants it is important you get specialist advice on the level of compensation offered; there may be tax implications if HMRC later consider the amount paid too low.
Read more detail in our article on calculating settlement agreement tax
Other clauses and factors to look for in a settlement agreement
Pay in lieu of notice (PILON)
Pay in lieu of notice means getting paid for your notice period in your contract but not having to work it. For example if your employer has to give you one month’s notice to terminate your contract, then, instead of asking you to work for that month, they could just terminate your employment and let you go home but still pay you for it. This is especially valuable if you have a long notice period.
Pay in lieu of notice is available from many companies if there has been some kind of dispute or disagreement at work, because in such circumstances employers actually prefer to see the back of you rather than risk you carrying on and having an adverse effect on your colleagues. So it can be just a case of asking your employer to pay you in lieu of notice – you may not need to negotiate this at all. Of course if your employer offers you pay in lieu of notice then try not to smile too much, and just make out that you expected this as standard; then continue to negotiate the ‘ex gratia’ element of the deal. See our article on Pay In Lieu of Notice for further information
Statutory notice is the minimum notice period which you should have by law. This is different from your contractual notice period, which is the minimum notice period set out in your contract of employment. Sometimes your statutory notice period is greater than your contractual notice period, in which case the correct notice period to use is the statutory one. This is more common where you have been employed for a long time, because statutory notice increases, the longer you stay in the same job.
To calculate the statutory minimum notice period that you are entitled to, add up the amount of time worked continuously for your employer. If you have worked for one month or more, your notice period must be at least a week. If it’s between one month and 2 years, you are entitled to one week’s notice. For anything above 2 years’ service, you are entitled to one week per year worked, up to a maximum of 12 weeks for 12 years or more of continuous employment.
So, if you have worked for seven and a half years, you are entitled to 7 weeks’ notice. If you have been employed for 12 years or more, you would legally be entitled to 12 weeks. This minimum applies no matter what your contract says.
Sick pay in your notice period
If you are off sick and you have gone down to reduced pay, and then you hand in your notice, should you receive only sick pay during your notice period, or should you receive full pay?
The answer depends on the length of your notice. According to the Employment Rights Act 1996 (ERA) ss.86-89, if your contractual notice period is a week or less above the statutory notice period, then you will be entitled to receive full pay throughout your notice period, despite being absent due to sickness or injury.
If on the other hand your contractual notice period is over a week above the statutory minimum notice period, then you cannot benefit from the provisions of the ERA ’96 and you will only be entitled to receive your contractual sick pay (or statutory sick pay as the case may be).
So to give a practical example, let’s say that you have been employed for 4 years. Therefore your statutory notice period is 4 weeks. Now imagine that your contractual notice is one month. In this situation you can benefit from the ERA because your notice period (one month) is not more than a week above statutory notice (4 weeks). On the other hand if your contractual notice is 2 months, then you can’t benefit from the ERA because your notice is more than a week over statutory notice.
If this seems complicated to you that’s because it is. It’s worth asking your settlement agreement lawyer to check this and confirm it for you – that’s part of the job as far as we’re concerned.
Whatever your age it is important to consider your pension, but particular care should be made if you are nearing retirement. The following should be considered:
- Will pension payments continue after your employment has ended?
- Will a lump sum be paid into your pension?
- Do you have all the information, documents and contact details (of your pension provider) from your employer about your existing pension?
- Does the payment in the settlement agreement adequately account for any loss of employer pension contributions and pension rights?
See also below as well as our article about tax payments on pension payments
Personal injury and pension rights
While the settlement agreement will state that you give up all your claims to sue your employer, there are two exceptions which the law says can’t be settled even if you sign a settlement agreement. These are:
- Claims for an unknown personal injury where you are unaware of it at the time you sign a settlement agreement, but which later develops into an injury. This might happen, for example, if you were in contact with a substance at work that was believed to be harmless, but many years later caused a disease. In that case you would still be able to bring a personal injury claim when you discovered it, even though you had previously signed a settlement agreement.
- Claims for accrued pension rights: your pension is always protected and can’t be settled, so if it later transpired that your employer failed to pay into your pension when they were supposed to, then you could still sue them for that, even if you signed a settlement agreement at the time giving up all claims.
- If you hold shares you should check your shareholders’ agreement. You may be required to sell back shares on your employment ending.
- Check the share option scheme and what it states about leavers, it may be important that you do not leave as a ‘bad leaver’ or as someone who has left with ’cause’ and if the share options are valuable to you it should be stated within the settlement agreement that you leave as a ‘good leaver’. Ask the employer to confirm and in any event ensure you know what will happen to your share options.
See our article on shares and share options for more detail.
Employers often ask the employee to agree not to make disparaging remarks or to “bad mouth” the employer. There should be a reciprocal clause in which they agree or use their best endeavours to ensure that they and their staff do not make derogatory comments about you.
Employers often want the terms and existence of the agreement kept confidential. Be aware of this especially if you have discussed your problems at work. Where possible try to be discreet regarding who knows that you are in negotiations with your employer. In that way, if you are later asked to confirm that you haven’t discussed the issues, you won’t be in difficulty. Employers usually agree that confidentiality can exclude your immediate family, professional advisers and prospective employers.
Some employers offer outplacement services as part of an exit package in addition to the financial payment. This consists of specialist support in looking for work that can include career counselling, CV writing and interview preparation. It can be excellent and it’s worth asking your employer to include it, particularly if you are leaving an organisation that has employed you for a long time.
An agreed reference commonly forms part of the settlement agreement, but this is one of the things that’s often forgotten. Some employers will only confirm dates of employment and duties, whereas others are willing to comment favourably on an employee. What is agreed will depend on the employer’s usual practice and the circumstances surrounding your departure.
There is no obligation on any employer to provide a reference and it is one of the advantages of settling a case that a reference can be agreed as part of the agreement. So, if your settlement agreement doesn’t have a specific clause dealing with references, then ask for one!
After your employment has ended you may be able to claim job-seekers allowance (JSA). It is worth making a claim for JSA if you meet the eligibility criteria, as for the first six months this benefit is not means tested. Check with the DWP for more information and any recent changes in their criteria.
If you want to claim JSA, the reason for leaving in your settlement agreement should be carefully considered and where appropriate be labelled as “redundancy” as there is a risk that, if the agreement says you resigned, the Department for Work and Pensions (DWP) will not pay you. Having said that, it is notoriously difficult to convince employers to confirm in writing a reason for dismissal. It is worth asking but may not be worth making this a deal breaker.
Depending on your situation you may also be entitled to other benefits and you should check with the DWP to see if you are entitled to these, for example housing benefit, council tax benefit, tax credits. If you are long term sick or disabled you may be entitled to claim incapacity benefit and/or disability living allowance or its equivalent.
Mortgage/income protection insurance policies
If you have an insurance policy that will pay your mortgage or replace some or all of your income upon redundancy/dismissal, it is essential that you check out the terms of your insurance policy before you sign any settlement agreement. Some policies will only pay out if you have been dismissed or been made redundant. This means that if appropriate the agreement should make clear that the termination was dismissal and/or redundancy. However the same difficulties apply here as mentioned above – employers don’t like admitting why they forced you to leave.
Still not sure whether you should sign?
If your employer has offered you the option of signing a settlement agreement rather than just dismissing you and leaving you to claim your statutory and contractual entitlements, this is a often clear sign that you have the potential to do something your employer would really like to prevent, such as bring a claim or leak trade secrets.
You are therefore in an advantageous position and should be well-placed to negotiate for a better settlement. If you’re not confident about your negotiation skills, get a professional to negotiate on your behalf.
If you leave without signing a settlement agreement, then you will not receive any ex gratia payment from your employer. You will only be entitled to receive any statutory redundancy pay and any contractual benefits (eg notice pay, holiday pay and any salary outstanding). Your contractual entitlements are sacrosanct – an employer cannot take these away from you. Of course if you don’t sign, you will still be entitled to make an employment tribunal claim.