What Is A Reasonable Settlement Agreement?

For many employees, a settlement agreement offers a stress-free and efficient way to exit a role, avoiding prolonged disputes. But a common question asked by our clients are “what is a reasonable settlement agreement?”.

The starting point is common sense principles like, a bird in the hand is worth two in the bush. There’s no point pushing for more money if the costs outweigh the benefits. So, if you fall out with your employer, run up legal costs and it gets in the way of your next job, it won’t have been worth it.

In this guide, we’ll help you assess whether a proposed settlement agreement is reasonable. Understanding the key elements – such as fair notice period, holiday pay, financial compensation, restrictive covenants, and future claims – ensures you receive a fair deal.

Key elements of a reasonable settlement agreement

A settlement agreement is a contract covering an employee’s exit. In return for giving up any legal claims you should get a financial deal and other benefits. Settlements cover up ‘loose ends’ for an orderly and stress- free exit.

All reasonable settlement agreements should include the following:

Notice period

Your employer must give you notice to end your employment. This is normally in your contract but cannot be less than one week’s net pay for each completed year up to 12 weeks’ maximum. Employers will normally deal with this as follows:

• Pay you in lieu of notice (PILON). With PILON you receive a payment equivalent to your notice period without having to work it. Your termination date is brought forward so you can start work straightaway. If you get another job, you keep the money.
• Require you to work your notice. Though this is rare in settlement agreements, it is still possible, especially if the agreement involves a phased exit or transition period.
• Place you on garden leave. Where you are still employed and paid but not required to work or attend at the office. You have to be contactable but can start looking for work.

A settlement agreement should include precise details of your notice and confirm you will receive any payment due.

Financial compensation

One of the most important factors for employees considering a settlement agreement is the financial compensation offered. The amount can vary based on several factors, including your length of service, the circumstances of your exit, and potential claims you could bring against your employer.

It should be stressed that unfair dismissal is capped at one year’s pay with an upper limit of £115,115. To be eligible for this you would need to have a strong legal case and also be able to show that you will not be able to find work within a year. Tribunal’s rarely find this to be the case.

A reasonable settlement agreement also usually includes:

• Statutory redundancy pay (if applicable): If the reason for leaving is redundancy, you should receive the statutory redundancy payment. Statutory redundancy pay is always tax-free. Employers are not legally required to offer more than statutory redundancy pay unless the employment contract provides for enhanced redundancy terms. Statutory redundancy is based on a week’s pay which is around £700 for each year worked under the age of 41 and £1050 for each year worked over 41.
• An ex-gratia payment: This compensation payment is offered to you as a goodwill gesture. It is usually tax-free, up to £30,000 in the UK. More about this later…
• Bonus and commission payments: If your employment contract entitles you to upcoming bonuses or commission payments, these should be included in your settlement agreement, to be paid net of tax. Bonuses are often discretionary and made conditional on still being employment.
• Pension contributions: If your employer contributes to your pension, you can negotiate continued contributions as part of the settlement package. Amounts over £30,000 can often be allocated to pension to minimise tax.
• Holiday pay: A reasonable settlement agreement should include payment for any accrued but untaken holiday days, calculated based on your contractual allowance.

Your solicitor will assess whether the financial compensation aligns with what is reasonable and negotiate if necessary to secure a fair offer.

References and reputation

A reference will be necessary to secure future employment. While employers are not legally required to provide a reference, settlement agreements normally include one which then makes it a legal obligation. This might include:

• A standard reference: Larger employers often agree to provide a factual reference confirming job title and dates of employment.
• An agreed reference: Some agreements include a pre-approved reference letter outlining job responsibilities and performance highlights.
• A non-disparagement clause: This ensures the employer will not make negative statements about the employee after their departure.

If securing a favourable reference is important for your future career prospects, discuss this with your solicitor to ensure it is included in your settlement agreement. Regardless of the terms of the agreement, your employer cannot give a reference that is inaccurate or misleading.

Restrictive covenants

Settlement agreements often include restrictive covenants, which limit what you can do after leaving your employer. These may include:

• Non-competition clauses: Preventing you from working for a competitor for a specific period.
• Non-solicitation clauses: Stopping you from approaching clients, customers, or colleagues after leaving.
• Confidentiality clauses: Prohibiting you from sharing sensitive company information.
• Non-disparagement clauses: Preventing you from making negative statements about your former employer (or them about you).

Restrictive covenants should only apply if were included in your original employment contract, or if you receive additional compensation for agreeing to them.

If restrictive covenants are included, they should be fair and proportionate. Not least because overly restrictive clauses could negatively impact your chances of securing a new job. If the restrictions are too broad or unreasonable, they may not be enforceable under UK employment law.

Future claims

A settlement agreement waives your right to bring future claims against your employer. So, once you sign, you cannot take legal action for unfair dismissal, discrimination, or other employment-related claims (apart from in limited circumstances) *.

Before signing, ensure that:

• You fully understand the rights you are waiving.
• Any potential claims are considered in the compensation package.

A solicitor will assess whether the waiver of claims is reasonable and ensure you are not giving up significant legal rights without appropriate compensation.

*While a settlement agreement waives most future employment-related claims, certain rights cannot legally be waived. These include personal injury claims (unless known at the time), pension rights, and certain statutory rights (e.g. unfair dismissal) if the agreement is not finalised correctly.

What is a reasonable settlement agreement payout?

If your settlement agreement arises from redundancy, you are legally entitled to statutory redundancy pay, which is always tax-free. Any ex-gratia compensation offered is at the employer’s discretion and tax-free up to £30,000.

However, payouts can be significantly higher for senior employees or those with strong potential claims. Employers may offer enhanced settlements to mitigate reputational risks, protect sensitive business information, or ensure a smooth transition.

Several factors influence the amount you may receive, including:

• The strength of any legal claims: If you have a strong unfair dismissal, discrimination, or whistleblowing claim, your employer may offer a higher settlement to avoid legal proceedings, potential tribunal costs, and reputational damage.
• Company policies and precedents: Some businesses have established settlement ranges based on previous agreements.
• Negotiation leverage: If you possess specialist expertise, key client relationships, or industry influence, this can strengthen your bargaining position and lead to a higher settlement offer.
• Length of service and seniority: Longer-serving employees, particularly those in senior leadership roles, may receive larger settlements, reflecting their contributions to the company and potential difficulties finding comparable roles.

Timing of settlement payments

Settlement payments can be structured in different ways, which can affect the tax position:

• Lump-sum payments: Most settlement agreements involve a one-off payment to be paid within 7 to 28 days after the termination date/ signing.
• Staggered payments: Sometimes, payments may be structured over several months, particularly if the settlement is substantial. This can help spread the tax burden over different tax years.
• Employer payroll processing: Payments subject to tax (e.g., PILON and bonuses) are processed through PAYE payroll, meaning tax and NICs are deducted before the payment is made.

If you believe the payout offered is insufficient, or requires careful tax planning and payment structuring to maximise your settlement while minimising tax liabilities, a ‘same-day’ settlement agreement service would not be appropriate. We will refer you onto a firm with a litigation department.

Who pays for settlement agreement legal advice?

In the UK, for a settlement agreement to be legally binding, the employee must receive independent legal advice before signing. Employers typically offer a contribution towards legal fees to ensure compliance. This contribution is usually agreed in advance. If the legal fees exceed the employer’s contribution, the employee may need to cover the remaining cost themselves.

Negotiating a reasonable settlement agreement

When attempting to negotiate a fair settlement agreement, frequent points of discussion include the amount of financial compensation, adjusting restrictive covenants, and ensuring all contractual entitlements are met. Employers sometimes make an initial low offer.

If you believe your payout is insufficient, don’t hesitate to request a higher amount, especially if you have strong grounds for negotiation.

Tips for negotiating a better settlement agreement

• Assess potential claims: Most settlement agreements involve a one-off payment to be paid within 7 to 28 days after the termination date/ signing.
• Consider future employment: Ensure restrictive covenants (e.g., non-compete clauses) do not unfairly hinder your ability to secure a new job.
• Remain professional: Keep communication calm, professional, and solution-focused. A positive approach is more likely to yield favourable results. Don’t fall out with your employer! You may need them going forward…

A solicitor experienced in settlement agreements can review the contract to ensure it is reasonable, and where needed, negotiate more favourable terms on your behalf.

In many cases, when an employer has proposed a fair and reasonable settlement, extensive negotiations may not be required. In such situations, a same-day settlement agreement service can be the most efficient and hassle-free option, enabling you to review, finalise, and sign the agreement swiftly, so you can move forward with confidence.

How a same-day settlement agreement review can help

Once they know they are leaving, many employees prefer a swift and stress-free exit. This is where a same-day settlement agreement review service proves invaluable.

• Immediate legal advice: Get expert guidance on whether the terms of your agreement are fair and reasonable.
• Fast negotiation: If needed, your solicitor will promptly negotiate better terms to ensure you get a fair deal.
• Quick sign-off: Once satisfied, your solicitor will sign the agreement, allowing you to move forward with confidence.
• Employer pays costs: In most cases, your employer covers the cost of legal fees, meaning you receive this service without having to pay for it.

Need advice on whether your settlement agreement is fair?

In summary, a reasonable settlement agreement should provide a fair financial package, respect your employment rights, and protect your future career prospects.

Contact GTE Settlement Agreement Solicitors today if you have received a settlement agreement and need same-day review and sign-off. We’ll ensure your agreement is fair, legally sound, and finalised without delay – at no cost to you.

For your free consultation, simply call our office on 020 7247 7190 or complete the enquiry form on this page.