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A settlement agreement, previously called a compromise agreement, is a legally binding agreement, voluntarily entered into between an employee and their employer. Once this agreement is signed, the employee loses their rights to take any employment claims against their former employer to an employment tribunal.
The primary advantage of a settlement agreement for you, as the employee, is that you get to leave your employment on favourable terms. You may also get financial compensation and other economic benefits after your employer mishandled your case. It prevents the scenario of stressful, expensive, and time-consuming legal action in a civil court or at an employment tribunal.
Immediately after you sign your settlement agreement, you’ll receive a financial payment along with any other agreed upon benefits, such as a work reference, and you’ll end your employment formally.
You can use a settlement agreement to:
For instance, if your employer has said that you’re underperforming, instead of trying to prove them wrong, you can suggest ending the employment on favourable terms.
The amount you get largely depends on your case and the circumstances surrounding it, so averages aren’t helpful. However, if you have:
Then your case will most likely settle for between one and four months’ salary plus notice pay.
However, if you have evidence of whistleblowing or discrimination, you could get more, and the two years’ service requirement is no long relevant.
But if none of the above scenarios apply in your case, you have less bargaining power, even though sometimes a settlement agreement pay-out is possible.
There is no legal minimum for settlement agreement payments. However, you’re likely to get financial compensation through a settlement compromise agreement if your employer is worried about the complications of not settling.
There are maximum pay-outs, set by employment tribunals, especially for unfair dismissal claims. Employers aren’t bound to use the maximum pay-outs, but they can use them as guidelines when negotiating settlement compromise agreements with employees. These maximum pay-outs don’t apply to certain claims, such as whistleblowing and discrimination claims.
The settlement agreement typically states the full breakdown of payment amounts that an employee is supposed to get. Also, it states if any sums will be paid out tax free. For instance, a pay-out of £30,000 can be paid with no tax deductions, especially if it’s an ex-gratia payment (compensatory payment instead of a contractual payment).
The settlement agreement will also deal with your notice payment if it hasn’t been worked out. In April 2018, new tax regulations were created to ensure that all settlement agreement payments in place of notice (PILONs) are subject to National Insurance contributions and income tax in full. Your lawyer will check your employment contract before they draft your settlement agreement, to ensure that the amount you present to your employer is accurate and tax-efficient. As settlement agreements need your employer to provide you with a tax indemnity, the amount you present to your employer must be correct.
If your employer is offering you a settlement agreement as an alternative to redundancy, they must pay you at least the equivalent of a statutory redundancy payment. The calculation for this amount is based on:
Often, the statutory redundancy payment is part of the termination payment.
Read more about redundancy payment on our website and learn if small businesses have to pay redundancy in the UK.
You must make sure that your settlement agreement states that you’ll receive your normal salary and benefits up to the termination date.
Although all settlement agreements clearly state that an employee will receive their salary, whether you’ll receive your benefits is sometimes unclear. It’s essential to make sure that this is clarified, to avoid doubts.
Often, some benefits may extend beyond the termination date, including:
Normally, your employer will contribute towards your cost of seeking legal advice on the settlement agreement. That’s because settlement agreements are only legally binding if an employee gets legal advice on it. Often, the payment for legal costs will cover your lawyer’s fee in full, which means you won’t incur any charges.
Employers may offer additional compensation if the employee agrees to enter into additional restrictions upon termination from their current position.
This might include restrictions against:
Typically, this payment is a nominal payment, which ranges between £50 and £250. It’s essential to note that when negotiating this payment, you should consider the ex gratia payment, which is free of tax.
A settlement agreement helps you leave your current place of employment with financial compensation and other benefits. In return, it bars you from raising legal action against your former employer in civil courts and the employment tribunal. The payment you get from a settlement agreement entirely depends on your specific case, so there’s no specific average pay-out value. By working with a well qualified attorney or solicitor, you get a better understanding of how to approach this kind of situation, which can lead you to be more confident during the negotiations.
For further reading, check out our other articles such as Understanding a 6 month non-compete clause in the UK.
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