Settlement Agreement: Calculate how much you can get?

You have been through a tumultuous and challenging time with your employer. Maybe you were unfairly dismissed, made redundant or you were discriminated against.

However, you do not want to have to go to court to fight the matter, but your employer has come forward with a settlement agreement.

Unsurprisingly, you are not alone if you are unsure what this means and where to go from here. Settlement agreements and any associated compensation can be difficult and complex issues to resolve.

Read on for all you need to know about settlement contracts and how to ensure you get the compensation you are due.


What is a settlement agreement?

A settlement agreement is a form of contract used to resolve a current claim and prevent possible future claims from being brought forward.

Often referred to colloquially as a ‘gagging clause’ or a ‘golden goodbye,’ they can be a mutually beneficial way of ending a working relationship without the added stress and worry of future recourse.

What are the reasons for a settlement agreement?

There are countless reasons that an employee and employer may decide to use a settlement agreement.

Reasons can include:

  •  The employee’s contractual rights have been breached
  • Protracted debates over redundancy, discrimination, or unfair dismissal
  • There is an ongoing dispute between employee and employer
  • One or both parties want to terminate the contract of employment

A settlement agreement can be used in cases where one party is not an employee. An example of this could be external employers lodging a grievance with a company or organisation.

Why are settlement agreements used?

There are many reasons why an employer could offer a settlement agreement. That said, they are most commonly used in the following circumstances:

  • To detail the terms of termination with certainty
  • Ensure an employee continues to cooperate with particular restrictions and rules even after the end of their employment
  • To settle or end any threats for future Employment Tribunal claims
  • As standard practice for a company’s Human Resources or Personnel Department

Thus, if you are unsure why you have been offered a settlement agreement, then we recommend that you seek urgent legal advice before responding or acting on the contract.

Reaching a settlement agreement

In order for a settlement agreement to be legally binding, certain conditions need to be met. As per the ACAS guidelines, these conditions are as follows:

  • Any agreement must be in writing
  • The arrangement must be made concerning a specific complaint or issue
  • The employee must seek advice from an independent legal affiliate or trade union official before agreeing or signing
  • The employee’s advisor must have a current contract of insurance or professional indemnity policy to cover the risk of any possible claim arising from incorrect or insufficient advice
  • The agreement must name the adviser
  • The contract must confirm that all relevant statutory conditions regulating the settlement agreement were met

An employee must be given a reasonable time in which to consider the conditions of the agreement and seek advice. There is no definitive explanation of what would be ‘reasonable’. However, ACAS recommends ten calendar days unless both parties agree otherwise.

What does a settlement agreement include?

In a standard agreement, there are usually some universal or standard inclusions. The most common requirements are:

  • Confirmation on how any notice period or outstanding holiday pay will be managed
  • The total amount of any ex-gratia compensation that will be paid to the employee for loss of employment. This can be tax-free up to £30,000
  • A mutually agreed reference
  • Confirmation that the employee will not pursue any future claims against the employer

How to calculate a settlement agreement?

The amount of compensation an employer awards can depend on a variety of factors including any contractual or statutory entitlements.

Various considerations need to be taken into account when calculating an agreement.

Above all, we always recommend seeking independent legal advice before trying to negotiate a sum or agreeing to an offer.

Some elements that an employee or employer might want to consider before approaching a financial settlement include:

  • The reason a settlement is being offered
  • How long will the case be protracted if a settlement is not made?
  • The employee’s salary or loss of any benefits or holiday pay
  • The length of service
  • How difficult may it be for the employee to find new gainful employment?

If you have been proposed a settlement amount, here is a rundown of how to assess whether the total you have been offered is fair.

1. Get your ducks in a row!

To evaluate your settlement amount, you need to have your paperwork in order and gather all your relevant documentation. This should include:

  • At least three months previous payslips
  • Your employment contract
  • Your P60 tax summary
  • Details of any benefits, bonus schemes or shares
  • Your redundancy policy
  • Pension information

2. Know your numbers!

Using all your collected documents, calculate your entitlements. This means the value of your pay and benefits both before and after-tax.

3. Check, check and check again!

Do not assume or place all your trust in what your employer has supplied.

Everyone can make mistakes, so check vital facts such as:

  • Your start date
  • Your end date
  • How many complete years of service you have?
  • What your contract of employment says?
  • When any notice was served

4. Know your entitlements!

Check your start date and work out your statutory minimum notice period.

A notice period is one week for each full year, up to a maximum cap of 12.

Compare this against the details in your contract of employment as it may differ.

5. Fringe benefits!

Do not forget to consider any allowances you have lost or any future allowances you will lose due to the circumstances. To calculate your benefits, check your most recent P11D form, or speak to your payroll department.

Pensions contributions, car allowance, health cover, gym memberships…these can all add up. Most importantly, do ensure you get what you are entitled to.

6. Leave allowance!

Similarly, you are legally entitled to receive payment for any holidays you have accrued, but not taken; up to the date, your employment was terminated.

Your minimum entitlement is 5.6 weeks per year. So, if you work five days a week, then you are entitled to 28 days a year (inclusive of bank holidays). However, your contract of employment may state you are entitled to more. Make sure you check.

7. Redundancy recompense

Furthermore, if you have two or more years’ service and have been made redundant, then you will be eligible for a statutory minimum redundancy payment.

The total amount owing will depend on your length of service, age, and gross weekly pay.

For more information, you can use the government redundancy calculator.

8. Sickness and ill-health cover

There are many elements you will need to check to ensure that you are paid what you are due. Do not forget any applicable health insurance protection. This can include permanent health insurance, critical illness insurance, ill-health retirement and ill-health pension benefits.


In conclusion, if your employer has offered you a settlement agreement – then do not panic! We have qualified employment solicitors waiting to hear from you, armed with professional advice and expert guidance. Contact us today!

Related article: Gross Misconduct: Your questions answered!

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