This page deals with what the terms of a settlement agreement usually contains, what the package can include, what the deal is, what the money should be and what the tax position is. If you need to understand more about what is a settlement agreement then look at my other pages first (or just give me a call).
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If you’ve been given a Settlement Agreement with an urgent deadline I’ll try to get you seen within 24 hours.
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What is a reasonable settlement agreement? How much should I get?
There are certain sums which most settlement agreements include. These are:
- Notice Pay – this should be your contractual notice period either paid instead of notice (Pay In Lieu, or PILON) or you should have be given and made to work your notice period. This is taxed.
- Holiday Pay – you should be paid a lump sum for accrued but untaken holiday pay. This is taxed.
- Pension Contributions – unless your contract of employment excludes this, you should also receive pension contributions on your notice pay.
- Redundancy Pay – if you are being made redundant, then you receive Statutory Redundancy Pay or enhanced redundancy if offered by your company.
- Settlement Payment – sometimes called an “ex-gratia” sum, compensation payment, termination payment or settlement payment, this is the sum you receive to waive your rights to bring a claim, and therefore this sum needs to reflect the circumstances surrounding your termination.
When providing advice on settlement agreements, I take time to understand what possible claims you might have at an Employment Tribunal, and use this to work out what level of settlement payment should be.
At Employment Tribunals, you can claim for all types of employment rights such as unfair dismissal, discrimination, equal pay, and such like. Awards at Tribunals include:
- Contractual Payments – eg notice pay and holiday
- Basic Award – based on length of service multiplied by weekly pay (subject to caps) which is akin to statutory redundancy pay
- Compensatory Award, which is split into two categories:
- Loss of Earnings to date of Tribunal
- Future Loss of Earnings
- Discrimination awards / injury to feelings
When you consider what the offer is under your settlement agreement, you need to think about what amounts you might win at an Employment Tribunal. This can be difficult to work out, particularly in respect of the loss of earnings aspect – who knows how quickly you will get a job. Accordingly, reasonable offers in settlement agreements are ones which take into account some loss of earnings as well as the contractual payments.
Over the years, I have seen settlement agreements range from zero (eg on disciplinary type issues) to as much as 12 months equivalent earnings.
Rest assured, if you instruct me, I will advise you on what is reasonable in your circumstances and, if needed, I will try to negotiate you a better deal.
Can I request a payment in lieu of notice (PILON) or can the company force me to work my notice period?
This will depend on your contract of employment, but sadly most contracts do not include clauses about it.
Ultimately, a settlement agreement is an agreement meaning that both parties need to agree on its terms. So, if the company cannot afford to pay a PILON payment upfront, then there is nothing obliging it to do so. However, 95% of the settlement agreements I’ve dealt with would have a PILON payment rather than making the employer work their notice period.
If you have already got another job lined up, there is in fact nothing stopping your employer from refusing to pay your notice period in lieu. From a legal position, this is because you would have no losses on the breach of contract.
What other benefits should I get under a Settlement Agreement?
You should get all benefits under your contract of employment for the notice period. If you are being paid in lieu of notice, then I would argue that you should also receive a payment in lieu of your benefits.
Some benefits which are frequently included in settlement agreement packages include:
- Bonus payments – remaining eligible for the year-end bonus
- Share schemes
- Out-placement support (to help you with CV drafting etc)
- Retaining company property (e.g mobile phone, laptop)
- Receiving an agreed reference
- Keeping or use of your Company Car for an agreed period of time
- Repayment/waiver of debts owed to your employer
Is a Settlement Agreement Tax-Free? What is the tax treatment of payments?
The general rule is that the first £30,000 of settlement payments can be made tax free, providing that they are wholly related to the termination of your employment and are not to do with your contractual entitlement.
There is now a reasonable complex tax legislation which includes a formula for working out tax liability and whether any payment is “Post-Employment Notice Pay”.
| Payment | Taxable or Tax-Free? |
|---|---|
| Notice Pay (PILON) | Taxed – at your usual rate on top of that year earnings |
| Holiday Pay | Taxed as per notice pay |
| Bonus Payments | Taxed – at the tax rate when paid |
| Pension Payments | Tax relief |
| Restrictive Covenants/Confidentiality Clauses | Taxed |
| Compensatory Settlement Sums | Tax-free up to £30,000 |
| Redundancy Payments | Falls within the £30,000 tax-free payment above. |
| Outplacement Support | Paid by the employer and thus not taxable or not part of the £30,000 allowance. |
| Legal costs | Not taxed and not part of the £30,000 tax-free element. |
Can you get me a better deal on my Settlement Agreement?
Often yes, but much depends on your circumstances and the reasons for your employment being terminated.
I will look at all of the above payments to make sure you are getting them, getting the right amount and if not, go back to your employer and try to get you more. Sometimes getting a better deal includes more money, a different wording to reduce tax liability, wording to get you more benefits or just a fairer agreement.
Why use Steven Mather Solicitor to advise on your settlement agreement?
I’ve helped thousands of clients like you to sign off settlement agreements, provide expert advice, negotiate better deals and do all this quickly, at your convenience and within budget.
In working with me, you get:
- Quick responses – I will do my best to see you the same day if required, at a time to suit you. We can meet locally in Leicestershire, or meet on the phone or online via Skype, Zoom, WhatsApp or FaceTime – whatever suits you.
- Friendly understanding advice – I know receiving a settlement agreement and losing your job is probably one of the most stressful times for you and you’ll have lots of questions, but don’t worry, I’ve done this before! I’ll help you and explain in Plain English all you need to know. Don’t worry!
- Fixed fees, paid by your employer – my fees are limited to whatever contribution your employer offers, subject to a minimum of £250 plus VAT.
- A Better Deal? – depending on your circumstances, I may advise that we try to get you a better deal, more money or negotiate the terms and wording of the agreement.
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Steven Mather
Settlement Agreement Solicitor
Solicitor in Leicester, or Online.