A settlement (compromise) agreement consists of legally binding terms and clauses between an employer and employee, in which both parties agree to settle their claims and disputes, usually in return for financial compensation.
These payments can either be subject to tax and National Insurance contributions or can be paid tax-free depending on what the payments relate to, and the amount the employee is offered depends entirely on the circumstances surrounding the settlement agreement.
If you’re currently in the process of negotiating a settlement agreement and you’re wondering what to expect in terms of payment, we’ve broken down some of the most common questions surrounding this area to give you a clearer idea.
We also have a calculator which you can use which will give you an idea of sums you could expect.
What are the advantages of settlement agreements?
There are many advantages associated with accepting a settlement agreement from your employer. If you’re currently trying to settle a dispute and this option has been provided to you, here are some of the advantages:
Receive compensation for discrimination at work without having to go through the stress and delays often associated with employment tribunals
Negotiate payment increases that are better than statutory payments such as minimum pay for untaken holiday, redundancy pay and notice period payment
Include additional non-financial compensation such as an agreed reference
Receive final legal closure in a shorter time
Earlier exit from work before the issue becomes too complicated and unpleasant
This is particularly useful if you have been told by your employer that you are underperforming – instead of trying to dispute this, you can suggest a settlement agreement to end the employment on mutually favourable terms.
What is the typical settlement agreement amount?
The amount you are offered in your settlement agreement by your employer can be influenced by various factors, such as:
Whether you have been working at the company for more than two years
Whether your employer has forced you to resign or already dismissed you
There’s evidence to claim for constructive or unfair dismissal
Should you fall into any one of these categories, you can calculate your potential settlement figure here.
If, however, there is evidence of discrimination or whistleblowing, you may be entitled to more, and the two years of service requirement would no longer be relevant.
What is a reasonable settlement agreement?
Settlement agreements can include more than just financial payments, although for many individuals, this can be the most important factor, meaning it must be negotiated properly to ensure an adequate amount is achieved through the agreement.
There is no legal minimum for settlement pay-outs, however, the employee will be likely to get a financial reward if the employer is concerned about the complications associated with not settling, such as being taken to an employment tribunal.
While employers will be unlikely to use the maximum pay-out for a potential award in the employment tribunal, they may enter into negotiations to reach an amount that is deemed suitable by the employee.
Do you pay tax on pay outs in a settlement agreement?
Since settlement agreement compromise payments involve a payment from employer to employee, they may be liable to taxations and National Insurance contributions.
We have written an in-depth article about settlement agreement tax implications should you wish to learn more about this topic.
How can a lawyer help with my settlement agreement?
A dedicated settlement agreement lawyer, personally assigned to you and your situation, can work closely with you to achieve a suitable settlement agreement, including the compromise agreement pay-out amount.