Settlement agreements can often cause anger and upset, which may then be replaced with confusion. This can be a difficult time as losing your job is never easy.
As you may soon be unemployed and about to lose your primary source of income, you will want an understanding of what payments can be expected (and checked) in the settlement agreement.
What we have set out below are payments that are typically found in a settlement agreement, with some information on what to look out for.
If you have been given a settlement agreement, then please get in contact with us. We will get back to you immediately and have a track record of turning settlement agreements around quickly and getting you the best terms possible. We deal with settlement agreements frequently and when you speak to us, we will put you at ease, answer your questions, and help you resolve the issues you are facing at work (and even better, in virtually all cases, our fees for advising on settlement agreements will be covered by your employer).
The Termination Date
If you are still employed, then the first thing to check is usually the “Termination Date” in the settlement agreement. This is the date the employment is due to come to an end.
What you are looking for here is that the settlement agreement states that you will be paid your normal salary (and benefits, if applicable) up to the Termination Date.
Further, you are also checking the Termination Date is not too soon, which will mean your employment will end sooner and this amount of salary will be reduced.
The Acas guidance suggests that employers give employees at least 10 days to consider a settlement agreement. We often see employers ask for a much sooner Termination Date (a few days after providing the settlement agreement), so it makes sense to ask for the Termination Date to be pushed back and beyond the initial 10 day period for you to respond, as this may mean your final salary payment will be higher.
You will need to understand at this point if the Termination Date is before or after your “notice period” so there is an agreement on whether you are to work your notice (and be paid in the normal way) or to receive a Payment in Lieu of Notice (aka as a PILON).
Your Notice Pay
The settlement agreement will deal with your notice pay if you are not going to work your notice period. This point can be cross referenced with your termination date.
It is often favorable for the termination date to be pushed back (as discussed) and for you to receive a PILON, which means you will be paid for the duration of the notice period, without having to work during that period. However, you must consider whether anything will be lost taking this approach, for example, if your employment ends sooner, will you be missing out on any commission, a bonus, the vesting of shares etc.
The most common approaches to notice period when an employment is to end are:
- The employee works their notice and gets paid in the normal way.
- The employment does not work their notice and they receive a PILON (a payment equivalent to what would have been earned if working).
- The employee is placed on “Garden Leave,” which is when they are not actually working, but the employment contract remains in force and they get paid as normal.
For notice pay, you must check that the duration and payments proposed are correct and consider if ending the employment sooner will result in the loss of any other payments.
Notice pay is taxable.
Holiday Pay
When an employment ends, you are entitled to paid for any accrued holiday that has not been taken. This is known as pay in lieu of holiday.
It is important to check the contract to see if there is a comment on how many days of holiday you have and how holiday pay is calculated on termination.
If there is no comment in the contract, then the amount to be paid is based on the statutory entitlement. If you work full time, then the statutory minimum holiday is 5.6 weeks (28 days). If you work part-time, you will have a prorated amount of holiday.
Calculating holiday pay can become complex, but some key points to consider are:
- Your entitlement to holiday is calculated up to the termination date, which will therefore vary depending on if you work your notice.
- You will need to know the annual leave year to calculate your entitlement, but most employers follow the calendar year (1 January to 31 December).
- Holiday is generally use it or lose it, unless your contract permits holiday to be carried over or you got agreement from your employer to carry days over.
- Understand the figure (or rate) used when calculating holiday pay, which can be tricky if you have variable hours or variable pay.
If the settlement agreement simply states you will be paid any accrued but untaken holiday, then we would seek to confirm the amount of days to be paid and to obtain the total amount. This enables the amount of days and figures to be double checked.
Holiday pay is taxable.
Expenses
A settlement agreement will often deal with expenses and state that the employee has submitted all expenses and this shall be paid in the normal way.
However, it is best to double check that everything has been submitted and for the settlement agreement to acknowledge the figure outstanding and when it will be paid.
This will iron out any ambiguity and you can be certain the total amount of expenses submitted will be paid.
Redundancy Payment
If your employment ended via redundancy then (as long as you had two year’s service) you are entitled to a redundancy payment.
You should check the calculation (there are online calculators for this) along with your contract and internal policy documents to see if there is any reference to an “enhanced redundancy payment.”
Some companies use different calculations, meaning the payment will be enhanced (so higher) than the statutory entitlement (there may be qualifying criteria, such as length of service).
Redundancy pay is tax free up to a £30,000 threshold.
Other Payments
Here we are referring to:
- Pension arrangements.
- Bonus/commission.
- Shares/long-term incentive plans (including RSUs).
We have put these together as (excluding pension payments) they may or may not apply.
If they do apply, make sure they are specifically referenced in the settlement agreement (they are often forgotten), which should set out the exact figures and payment dates. If something is not properly addressed, you may lose out on the payment or not receive the amount you were expecting.
It is best to obtain clarity on the figures and you can address any discrepancies before it is too late.
Some of these payments (such as bonuses / shares) may be subject to other documents which will need to be reviewed.
Ex-Gratia Payment /Termination Payment
These are additional payments, often referred to in settlement agreements as “Termination Payments” and in negotiations as “Compensation Payments.”
An ex-gratia payment is essentially a goodwill payment, meaning it is an additional payment to compensate you / settle a dispute.
The added benefit of an ex-gratia payment is that the first £30,000 is usually paid tax fee.
Conclusion
These are the most common payment arrangements seen in settlement agreements, but it is not an exhaustive list. The main takeaway is to make sure all your entitlements are recorded and set out correctly.
If everything is set out correctly, that does not mean you have to accept that position, because you may able to negotiate the sums of money on offer. We have an article covering negotiating settlement agreements HERE.
Disclaimer:
This blog is for information purposes only. Nothing should be relied upon as a substitute for legal advice and nothing written should be construed as legal advice or perceived as creating a lawyer-client relationship.