What is a Reasonable Settlement Agreement?
When an employer offers an employee a financial package on termination of their employment the employer will usually ask the individual to sign a Settlement Agreement. This is particularly likely if the employer is offering a financial package which is higher than what the employee is legally entitled to either by virtue of their employment contract or their statutory rights such as an enhanced redundancy package beyond statutory redundancy pay.
What is a reasonable offer of compensation in a settlement agreement?
Generally, when clients ask us this question, we are thinking 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, amongst others. 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 payments within the Settlement Agreement.
It is important to bear in mind that each case is different and the particular circumstances of the specific client with the Settlement Agreement will of course differ and therefore how much would be reasonable will vary. In our experience most employers are using some kind of formula based upon length of service and salary when choosing redundancy payouts, and redundancy compensation sums tend to be around the equivalent of 2-3 months’ salary on top of statutory redundancy pay. Settlement Agreements offered as an alternative to capability proceedings (such as performance improvement plans) or as a means of resolving grievances and disputes initially tend to be quite low, around the equivalent of 2 months’ pay. It is here where it becomes tempting, and at times, advisable, to seek to negotiate the offer.
If the individual who is being offered the Settlement Agreement has experienced discrimination, harassment or victimisation in the workplace, they can expect, or at least will have good grounds, to seek to negotiate a higher-than-average financial package. If, on the other hand, the situation is one of genuine redundancy, the financial package – whilst higher than the statutory regime – will not necessarily be a significant sum and may not be as simple to renegotiate especially if they employee has been employed for less than two years.
There is no one-size-fits-all where settlement agreement compensation is concerned 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.
How is redundancy calculated?
Statutory redundancy pay is calculated based upon the employee’s age, length of service and weekly pay. An employee needs to be employed for two years before they are entitled to statutory redundancy pay.
A ‘week’s pay’ is capped (and is usually revised each year).
| Age range | Formula |
| 17 – 21 years old | 0.5 week’s pay per year of service |
| 22 – 40 years old | 1 week’s pay for each full year worked from aged 22 |
| 41 years + | 1.5 week’s pay for each full year worked from age 41 |
Employees can calculate their statutory redundancy pay via Gov.UK
If an employee is being asked to sign a settlement agreement due to redundancy it is likely the employer will offer a settlement package which is in excess of statutory redundancy pay.
Non-financial aspects of a settlement agreement
Sometimes it is the non-financial aspects of settlement agreement which may be more important. There can be a real benefit to some employees to have an agreed employment reference (or a contractual obligation on an employer to provide an employment reference), or it may be important to have a restrictive covenant waived or reduced.
However, for the purposes of this article, we set out below a rough guide on what financial aspects you should expect to see in in an average Settlement Agreement –
- Payment of salary and contractual benefits (such as medical and life insurance) up to the Termination Date,
- Any bonus payment, share options or commission if applicable;
- Payment for all accrued but untaken holiday pay;
- Notice pay – either through working your notice period, a PILON (payment in lieu of notice), garden leave or a mixture of these;
- Statutory redundancy pay – only when it is a redundancy situation;
- A Termination Payment – this is the sum which is variable and the incentive for an individual to sign a Settlement Agreement. Usually, the first £30,000 can be paid tax free;
- 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.
