How Much Should I Offer My Employee in a Settlement Agreement?
As an employer it’s likely that at some point you will find yourself in a position where you either wish to let an employee go or you decide you would like to settle a claim that has been brought by an ex-employee.
If you reach an agreement with the employee, the deal would be drawn up in a Settlement Agreement. There are a number of elements to a Settlement Agreement. However the big question that most employers face is “how much money should I offer?”
Step 1 - Start With The Basics:
What Does The Contract Say?
There will be some payments that the employee is simply due and aren’t (normally) worth fighting over. Usually this will be their final salary payment, notice (unless they work their notice) and holiday pay in relation to any holiday they have not taken by the time they leave.
Occasionally an employee may be entitled to other contractual payments, such as a contractual bonus payment, commission or contractual redundancy pay. The best way to make sure you have covered all of these is to read the employee’s contract and see what it says.
Do I Have To Make Any Statutory Payments?
If you are dismissing an employee on the basis of redundancy and they have been employed by you continuously for two or more years then they will be entitled to be paid a statutory redundancy payment.
What Does The Employee Expect?
In addition to contractual payments, give some thought to whether there are any other payments that the employee may expect to be paid. For example, if there is a discretionary bonus scheme, do they have an expectation of receiving a payment in relation to it?
If an employee is not specifically contractually (or statutorily) entitled to a sum then you do not have to pay it. However, in some cases a “discretionary” payment may have become a contractual payment, owing to the frequency of it being paid in the past. If you suspect this may be the case you can always take advice on whether you owe a particular sum to your employee. However, either way, you should consider whether the sum is one you wish to dispute with your employee - will they agree to sign a Settlement Agreement without it and is it worth fighting over?! (Note - sometimes it IS worth keeping it back.)
Does the Employee Owe The Business Any Money?
Just because you’re in the process of working out what to offer an employee, don’t be scared to deduct any sums that are contractually due back to you. The employee may have a season ticket loan or may have taken more holiday than they have accrued by the time they leave. It is acceptable to explain this to the employee and (provided the employment contract allows for such a deduction) to deduct any sums they owe you from their final salary payment.
Step 2 - The Compensation Payment (aka, how much do you want to settle this claim?)
The Compensation Payment (also called an ex-gratia payment) is the part of a settlement that can be paid free of tax up to the value of £30,000 (including the value of a statutory redundancy payment if one is being paid).
This is the sum that should incentivise the employee to sign the agreement. Many employers see this as a “finger in the air” sum. But, with the right advice, it doesn’t need to feel, or be, quite as random!
The overarching question for the employer is not, “what can I afford?”, but “what is the potential cost to my business?” (And by cost I mean thinking about the time and effort that you have available to deal with a matter as well as cold hard cash!).
In short, taking everything into consideration, is it cheaper to settle or fight?!
You need to look at the situation:
“What is the risk of a claim?” In some instances employers don’t particularly expect that a dismissed employee will bring a claim but prefer not to take the risk, opting instead to offer a sum in exchange for the employee waiving their right to bring a claim by signing a Settlement Agreement. In other cases the employer may feel that a claim is highly likely. Obviously, your perception of the level of risk facing your business will have an impact on the size of the settlement sums you are prepared to offer.
“Why would I make an offer?” Are you just rounding things off and expect the employee will be on board with that, or are you worried about a claim and keen to settle? Are you prepared to see if a sensible settlement offer might bring an end to a matter quickly, but, if not, will be prepared to defend yourself?
“Is there a precedent I can refer to?” Have you settled with other employees in the past in similar circumstances? If so, would a similar approach work here?
“How far have matters already gone?” If a possible claim is on the horizon, look at how much of their own time and money the employee has invested into their complaint. This will help to give you a sense of how committed they are to their position.
“What is the likely cost in time, legal fees and, if I lose, compensation awarded against my business if I don’t settle a claim?” This is the question that forces employers to consider being pragmatic. Even if you strongly disagree with the employee’s claim, if it’s shaping up to be expensive and time consuming, you will need to make a choice as to whether you would prefer to spend your time and money defending the claim or on focusing on your business. In order to make this choice, you will need to know what you are facing, both financially and in terms of time and effort.
There isn’t a right or wrong answer to this. Plenty of employers take the view that they have more to gain by fighting a claim e.g. so as not to be seen as a walk-over by their remaining staff base. Plenty of others take the view that they would prefer to settle and move on. Ideally this would be a purely business based decision, although many employers find it is both a personal and a business decision. Either way, it is a decision that should only be made on an informed basis, after seeking legal advice on all of the possible costs and risks.
If you have decided to make an offer, you will need to consider how the person might respond to your offer:
"What is my relationship like with the employee?" Are you trying to maintain a good relationship with the employee, do you think they will be open to negotiation? Have they indicated a minimum expectation?
"What is/was the employee’s salary?" What may seem a large amount to a junior employee on a low salary may be viewed as a very small amount by a senior employee on a much higher salary. It can help to think in terms of offering a certain number of weeks’/months’ pay, rather than thinking in terms of actual figures, to keep perspective on how an offer may be viewed by the employee.
"How long has the employee worked for me?" A dismissed employee with a long service record may feel more aggrieved than others with a much shorter service history and it may well be reasonable to offer them a higher sum than others. You should think about how your treatment of the employee comes across to your remaining staff. (Yes I know Settlement Agreements are supposed to be confidential, but who knows what gets discussed at the pub?!)
"Is there anything non-monetary or inexpensive that I could offer as part of the deal?" For example, the employee may value a good, pre-agreed, reference from you, or you could agree to reduce the length of any restrictive covenants they are bound by. You could also say they are allowed to keep their laptop and mobile phone. These sorts of things can all be written into the Settlement Agreement.
How Much to Offer
If you decide to make an offer, there are a huge range of factors to take into account when deciding on an appropriate amount and I cannot stress strongly enough how important it is to take legal advice on individual situations, where all of the factors set out above will be examined in closer detail.
That said:
If you are comfortable that the matter is straight-forward and you are aiming just to round things off after e.g. a fairly amicable redundancy process, you are on good(ish) terms with your employee and have no suspicion they intend to bring a claim, you might consider offering between two weeks’ and two months' pay.
If the matter is less straightforward (perhaps your procedure wasn’t perfect, but you stand by your reasons for letting the employee go), you are still on speaking terms with the employee (just), but they have made it clear that they feel aggrieved and you don’t want the situation to deteriorate further - you might want to up your offer a touch, perhaps to between one and four months’ salary.
If the matter is not at all straightforward (perhaps they are already threatening to bring a claim, believe they have been discriminated against or claim they have been dismissed for whistleblowing) - take advice! Sorry! But when there is a clear risk to your business and the potential for a complicated claim the individual circumstances should be looked at very closely. The most sensible thing you can do is find out what the risk is and then work out a sensible offer (if you decide to settle) from there.
Overall, if you are keen for your offer to be accepted, you will need to believe that it is fair and reasonable. If you don’t feel that way, it is unlikely your employee will either. Try to imagine yourself in the shoes of the employee and think about what you would find acceptable.
Take Advice On Tax
It is always worth taking advice on which parts of payments made under a Settlement Agreement are subject to tax. In brief, if the employee is to be paid in lieu of notice (or any part of their notice) income tax and National Insurance Contributions will be payable on that sum. Where the notice period hasn’t been worked, but no sum is specifically allocated to notice in the Settlement Agreement, tax will still be due on an equivalent sum paid under the Settlement Agreement. Basically, there’s no way out of it!
As explained above, the compensation payment (and any statutory redundancy payment making up part of it) can be paid free of tax up to £30,000. Once you cross that threshold, tax will become due on the extra amount.
There are also other areas where sums may be taxable in the Settlement Agreement, but that’s for another day!
If you would like help with any aspect of potentially offering a Settlement Agreement to an employee, call me for a free half hour chat!
