In the context of the United Kingdom, a settlement agreement is an employment contract which an employer and employee sign to formally agree upon the terms of resignation and mutual disengagement from the employment relationship.
These agreements often have compensation elements, and for an employee, understanding how to maximise that compensation is essential in such negotiations. Knowing your rights and how to seek an equitable settlement, especially with the expected legal changes in 2025, is extremely important.
Understanding Settlement Agreements
To avoid drawn-out court disputes, contracts are crafted such that the contracting parties can resolve issues on their own without professional mediation services.
These settlements are aimed at conflict resolution in a cooperative way so as to avert court litigation. These also entail, but are not limited to payments and confidentiality clauses, and at times non-compete clauses.
This means that the worker gives up the right to take some specified legal action against the employer.
Key Factors Influencing Settlement Compensation
- Length of Service and Employment Terms: The amount of service of a given employee together with the clauses in the contract of employment are of utmost importance to the value of settlement compensation. It follows that, the greater the period of service, the greater the compensation because of entitlement to accrued benefits and claims.
- Circumstances of Termination: Particularly relevant is the cessation of employment. For instance, there might be some discrimination or unfair dismissal evidence. In these scenarios, the demand for compensation is typically higher. In discrimination claims, for example, compensation includes ‘suffering’ and is generally not part of taxation, therefore, that payment is higher.
- Potential Legal Claims: The potential value of your legal claim may affect the amount offered in settlement. Employers, in particular, will attempt to avoid incurring some costs or reputational damage and offer greater payment instead.
Engaging with specialist employment solicitors, such as Gordon Turner, can provide valuable insights into these factors. Their professionals in employment law guarantee that all of the relevant factors that affect your settlement compensation are taken into consideration and properly dealt with.
Recent Employment Tribunal Statistics
Studying compensation processes, as explained earlier, contributes to grasping the essence of the payment:
- Unfair Dismissal Claims: During the year 2022 – 2023, the figure capturing the maximum award for unfair dismissal shall be computed at £179,124. The median shall stand at £6,746 while the average award is £13,749.
- Discrimination Claims: Differential compensation is given across various discrimination cases:
- Age Discrimination: Maximum award of £261,949. The median award was £86,349, the Average award was £102,891.
- Sex Discrimination: Maximum award of £995,128. The median award was £16,161, and the Average award was £53,403.
- Disability Discrimination: Maximum award of £964,465. The median award was £17,218, and the Average award was £44,483.
The figures given illustrate the amount of compensation that is likely to be awarded, particularly in discrimination cases.
Tax Implications
Understanding the nature of tax on the payment in settlement is no less important:
- Tax-Free Allowance: Payments that are not related to salary or other forms of earnings are tax-free if made straight to the concerned individual and does not go over the limit of £30,000.
- Notice Pay: Payment in lieu of notice (PILON) has national insurance implications along with taxation.
Strategies to Maximise Your Settlement
- Seek Legal Advice Early: When dealing with the issues of dominance and the potential value to be obtained, answering the questions is critical. Free consultations are commonplace prior to work commencement for solicitors that are employed.
- Negotiate Beyond Financial Terms: Consider negotiating their payment in a form other than cash for more non-traditional benefits, including a positive reference, outplacement, or excluding a non-solicitation clause, which is restraining as far as future employment for the individual is concerned.
- Understand the Tax Position: Pay close attention to the ways in which the constituents of the settlement payment will create unintended tax consequences, particularly with regard to the timing of accruals. For example, payments for post-employment aid are presented without tax burdens.
- Be Prepared to Raise Formal Grievances: Sometimes, being overly aggressive can lead to the opposite effect where the opposing employers less formally and more diplomatically end up providing better terms simply to avoid a formal showdown.
Legislative Changes in 2025
The specified settlement terms may be impacted by the upcoming changes to the UK employment legislation.
- Employment Rights Bill: New laws passed by Parliament in October of 2024 will integrate new protective measures against unfair dismissals from the commencement of employment and will also prohibit fire and rehire practices.
- National Living Wage Increase: Changes to the National Living Wage are anticipated by April of 2025, which will impact salary calculations.
Conclusion
To maximise value from the settlement agreement, one needs to comprehensively grasp the law to one’s employment rights, personal circumstances, and the law. Being updated with legal practitioners aids in striking a balance in the budgetary constraints of the employer while still meeting the expected requirements.
