This is a question that comes up regularly, and fortunately for you we have a unique settlement agreement calculator which helps you work out how much you might get paid under a settlement agreement with your employer.
The question of how much compensation in a settlement agreement is worth us looking at in a bit more detail.
What Sums Are Paid Under A Settlement Agreement
- Notice Pay
- Holiday Pay
- Salary until termination
- Benefits until termination
- Pay in place of benefits during notice period
- Compensation / ex gratia / settlement sum
- Legal costs
Notice Pay aka Pay in lieu of notice or PILON
Your settlement agreement will usually pay you your notice period pay in a lump sum, called “in lieu” which means in place or instead of. So pay instead of notice, or PILON, means that you get paid a lump sum instead of working out your notice period.
Your contract of employment may set out what your notice period will be, say 3 months or 6 months notice. If the contract doesn’t say then you get 1 weeks notice for each full year you’ve worked at the company for, up to a maximum of 12 weeks.
It is possible, of course, for an employer to ask you to work your notice period rather than pay you, and that’s entirely legal.
Do remember that any PILON will be taxable.
Every settlement agreement should include a figure for untaken but accrued holiday pay.
That means holiday which you have not taken yet.
Say you get 25 days holiday each year, January to December. Say you leave in June. And say you’ve already taken a week’s holiday. This should see you with 5 days left to take.
The settlement agreement should have a payment for that untaken holiday, and actually it can soon add up depending on your salary. Again, remember that it will be taxed.
Salary to termination date
Most settlement agreements will have a termination date in the future. It may only be next week or at the end of the month, but usually it will be after the date you sign.
If that’s the case, then the agreement should state that you will receive your usual salary up until the termination date.
In the rare occasion that your employment has already ended, then the settlement agreement may not include a figure for salary up to termination date. When I am giving advice on a settlement agreement in these circumstances, I’ll check to see whether you did in fact get paid already.
Benefits until termination
While not usually a payment (unless you get a car allowance or similar) your settlement agreement should also confirm that you’re entitled to all your benefits until the termination date.
It will usually say that any benefits will also cease at the termination date, along with any entitlement for any other payments.
Benefits where a PILON is paid
Under your contract of employment, you’re entitled to whatever benefits you are offered by your employer – private health, insurance, car, pension etc.
If you are not working your notice period and instead are being paid in lieu (a PILON) then you’ll miss out on these benefits and so the settlement agreement should make a payment in place of you actually getting the benefits. Such sums are taxable mind,
Many settlement agreements do not add this extra compensation figure in, and for most they are not worth huge amounts, but if you have a 3 or 6 month notice period, and are a high earner, then they can be worth ensuring they will be paid. I help negotiate better deals with settlement agreements and so I’ll always try to include this in any I see.
Settlement Agreement Compensation aka the Termination Payment / Settlement Payment / Ex Gratia Sum
The compensation payment in a settlement agreement comes in a variety of different names, but this is the main part if the agreement and really what matters. The other sums above are contractual, meaning that the employer has to pay them to you or else they are in breach of contract. The compensation sum, however, is the payment made as a gesture of goodwill, to compensate you for your employment being terminated.
This amount will differ depending on your circumstances.
For example, it could be just statutory redundancy pay. It could be an enhanced redundancy pay. Or it could be more, to reflect the potential claims that you might have against your employer.
My task as your settlement agreement lawyer is to advice you in the term and effect of the agreement, and that includes whether the compensation payment is sufficient.
To consider that properly, we need to know whether you do have any valid claims against the company. We can then look at what you might get if you went to an employment tribunal. We’ll discuss this when we give advice on whether your settlement agreement figure is correct, but in short, if you go to an employment tribunal and win then you may receive:
- Basic Award – this is calculated in the same way as statutory redundancy
- Loss of length of service – a few hundred pounds maybe
- Compensation for loss of earnings
- Compensation for future loss of earnings if you still didn’t have a job by the time you reached trinunal
- Payment for discrimination
- Compensation for personal injury such as stress and anxiety
- Uplift of 25% of above if no fair procedure was followed
Calculating your settlement agreement figure is therefore quite complicated and so your advisor should give advice on the figures included in your agreement.
In the round, somewhere between 1 and 6 months of salary is quite usual for the compensation figure.
Settlement Payments under this heading are usually tax free up to £30,000.
Legal Costs in Settlement Agreements
Your document will usually confirm that your employer will contribute towards the legal advice on settlement agreements. While this is not usually a payment to you, it is worth mentioning.
It is also important to know that it’s not a legal obligation for your employer to pay, its all just part of the package and more custom and practice than anything else.
A recent Employment Tribunal case suggested that £500 plus VAT is the minimum that a solicitor could possibly review a standard settlement agreement for. However, the figure in agreements varies between £250 and £2,500 depending on complexity and value.
Whatever your employer offers as a contribution, then if you instruct us today our legal fees will be capped at that contribution, so you do not need to worry about paying more. I know some firms have a minimum charge of £500 plus VAT, but we will advise on all settlement agreements.
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