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How Much Is The Average Settlement Agreement Pay-Out?

20 December 2021
How Much Is The Average Settlement Agreement Pay-Out?

A  settlement (compromise) agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return, the employer will agree to pay financial compensation. Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter. Such payments can attract income tax or national insurance contributions – but they can also sometimes rightly be paid tax-free. How much an employee is offered in a settlement agreement will depend on the circumstances surrounding the settlement agreement. However, if an employee has:

  •  Been working for over two years and
  • The employer has forced them to resign
  • There’s sufficient evidence to prove constructive or unfair dismissal;

Then the case will most likely settle for between one and four months’ salary plus notice pay.

However, if there is evidence of whistleblowing or discrimination, it could be more, and the two years’ service requirement is no longer relevant. As you can see, many factors play a role in determining how much a settlement agreement should be. In this post, we look at how much is the average settlement (compromise) agreement pay-out?

What Is A Good Settlement Offer?

Although a settlement agreement can include much more than a financial payment, the money is bound to be an important question for almost anyone who is about to lose their job.  There is no legal minimum for settlement agreement payments. However, an employee is likely to get financial compensation through a settlement compromise agreement if the 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.

In determining what monetary value is appropriate for a settlement agreement an employment lawyer will generally analyse a particular situation based upon two types of analysis:

  • What (in the lawyers experience) would they normally expect an employee to be paid under their settlement agreement given their circumstances; and
  • Given the particular circumstances of an individual case, what is an appropriate amount for a particular settlement agreement?

The rough ‘rule of thumb’ that is generally used to determine the value of a settlement agreement (in respect of compensation for termination of employment) is two to three months’ gross salary. What you should receive in respect of your particular settlement agreement, based on your circumstances, will depend upon each individual situation.

What is included in a settlement agreement?

Generally, Settlement agreements (or compromise agreements as they used to be called), usually involve a payment from the employer to the employee. Such payments can attract income tax or national insurance contributions – but they can also sometimes rightly be paid tax-free. The standard terms of the settlement agreement are the following:

  • The outstanding balance of the salary, bonuses, commission and holiday pay of the employee;
  • A termination payment that will be paid by the employer to the employee for agreeing to terminate the contract. Generally, if the employee is a ‘bad employee’, as mentioned above, then he or she is in a weaker bargaining position and will not be able to demand a high sum of compensation. However, if there is no fault of the employee and he has provided satisfactory employment services, then he or she can negotiate a higher sum of compensation for terminating the employment contract.
  • Generally, the first £30,000 (not including payment in lieu of notice if such a clause exists in the contract) of the compensation payment is tax-free. Payments made for the period up to the point of termination of employment are subject to deductions of tax and national insurance in the normal way. This will include sums for accrued but untaken holiday pay, bonuses, commissions and so on. Any considerations paid for restrictive covenants and confidentiality will be fully taxable, as will payments made in lieu of holiday;
  • A Confidentiality or Non-Disclosure clause may be included which is usually of benefit to both parties;
  • A non-derogatory clause may be incorporated to prevent both parties from saying unpleasant things about each other.
  • The employee will usually waive most rights that he or she may have against the employer.
  • Typically the employee demands a ‘good reference’ which is often useful when applying for a new job. This is more difficult to obtain if the employee was regarded as a poor performer.
  • If an employer offers an employee a Settlement Agreement, they will usually contribute towards the legal costs. This is because it’s a requirement of a Settlement Agreement that each party gets independent legal advice. Without independent legal advice, the agreement won’t be legally binding.

Find out What Should Be Included In Your Settlement Agreement

Contact Our Settlement Agreement Solicitors to find out what should be included in your settlement agreement, or for further advice on Settlement Agreements. We welcome you to visit our contact us page or contact us directly by emailing contact@davenportsolicitors.com or giving our experts a call on 02079 036888.

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