What is a Reasonable Settlement Agreement?
When an employer offers an employee a financial package on termination of their employment which is higher than what the individual is entitled to by virtue of the contract or their statutory rights, the employer will invariably ask the individual to sign a Settlement Agreement. So, what would be a reasonable offer in a settlement agreement?
Generally, when we consider this question, we are talking about the discretionary element to the Settlement Agreement which can be referred to as a Termination Payment, Settlement Sum, Compensation Payment, Ex gratia Payment or a Redundancy Payment. The other payments under the Settlement Agreement such as salary and any other contractual benefits up until the termination date, notice pay, and holiday pay should be offered as a matter of course and set out as separate payment within the Settlement Agreement.
It is important to bear in mind that each case is different and the particular circumstances of the individual with the Settlement Agreement will of course differ and therefore how much would be reasonable will depend on each individual and their circumstances. For example, if the individual who is being offered the Settlement Agreement has experienced discrimination or harassment in the workplace, they can expect, or at least will have good grounds, to receive a higher-than-average financial package. If, on the other hand, the situation is one of a genuine redundancy, the financial package – whilst higher than the statutory regime – will not necessarily be a significant sum. There is no one-size-fits-all and you will need to discuss with your Employment Solicitor whether the offer is a reasonable one or if there are any grounds to negotiate a higher package. As a settlement agreement will usually prevent the individual from pursuing claims against their employer we would generally expect a termination payment to be in excess of what the individual is legally entitled to.
However, for the purposes of this blog, we set out below a rough guide on what you should expect to see in in an average Settlement Agreement –
1. Payment of salary and contractual benefits (such as medical insurance) up to the Termination Date, this can sometimes include a bonus payment or commission if applicable;
2. Payment for all accrued but untaken holiday pay;
3. Notice pay – either through working your notice period, a PILON (payment in lieu of notice) or garden leave or a mixture of these;
4. Statutory redundancy pay – when it is a redundancy;
5. A Termination Payment – this is the sum which is variable and the incentive for an individual to sign a Settlement Agreement, is usually (but by no means always) between 1 to 3 months gross salary and the first £30,000 can usually be paid tax free;
6. A contribution to your legal fees – the standard fee is £500 plus VAT but sometimes more is offered for senior employees or when the terms of the Settlement Agreement are more complex than the norm.
This article is intended as a basic guide for settlement agreements. If you require advice on a settlement agreement please use our CONTACT US form or telephone on 01483 303636 to see how we can help you.
