March 29, 2023
When faced with the prospect of losing your job, you will be tasked with several challenges. Firstly, though, you need to know how much Settlement Agreement compensation or severance pay is due.
If you’re wondering “how is a Settlement Agreement calculated?” or “how is a Settlement Agreement worked out?”, Premier Legal can provide world class advice to ensure that you receive a fair payout. In the meantime, the following information on severance pay will enable you to enter the process with confidence.
What Impacts The Settlement Agreement Compensation Figure?
Severance pay is a form of financial compensation that may be offered to an employee when their contract is terminated (or “severed”) early through no fault of their own. While it is not a legal requirement for employers to provide this, many organisations offer it to avoid having to go through long winded internal processes (such as performance management) and to avoid having to dismiss employees who are protected from unfair dismissal.
If you are not offered severance pay via a Settle Agreement, you may be entitled to redundancy pay as per the Employment Rights Act 1996 if you have at least two years’ continuous service. In this case, the maximum statutory redundancy settlement is capped at £16,140. Conversely, severance pay packages may include monetary payments such as bonuses and pension payments as well as an ex gratia compensatory sum.
As an employee, then, your first question isn’t: how is a settlement agreement worked out?
You should focus on your eligibility and the factors that could impact your severance pay compensation figure. The most influential factors include;
- The circumstances surrounding the employment termination – eg. redundancy, misconduct, performance or mutual agreement.
- How long you were employed by the company and your salary at the time of employment termination.
- Whether you have potential claims against the employer for unfair dismissal, discrimination, or breach of contract.
- Contractual entitlements
- The costs and risks that the employer may face when defending any potential claims that you make.
In some cases, your employer may make an initial offer of compensation which can open the door to potential negotiations on your behalf. Before accepting an offer though, you should seek legal advice to confirm that you are receiving a fair compensation package.
How is a Settlement Agreement Compensation Calculated?
Severance pay of up to £30,000 (figure correct as of March 2023) can be paid tax free although you may be subject to income tax and national insurance contributions on any payment above this threshold.
When calculating statutory redundancy payments, there is a defined calculation that means you’ll receive; half a week’s pay for each full year you were under 22, one week’s pay for each full year you were aged 22 to 40, and one and a half week’s pay for each full year you were 41 or older.
Calculating the severance pay in a Settlement Agreement is a more complex issue that will use all of the contributing factors mentioned above while there is potentially room for negotiation too. Using a dedicated Settlement Agreement calculator is the best way to gain an accurate estimate based on your circumstances.
As a rule of thumb, though, you can expect to receive a pay-out that is equivalent to between three and six months’ worth of your salary in addition to your notice pay and accrued holiday pay. This will usually ring true if you meet the following criteria;
- You have worked for the employer for at least two years.
- Have been forced to resign or dismissed through no fault of your own.
- Have the evidence to confirm a constructive dismissal.
- Have not yet secured new employment at an equivalent or higher salary
There are situations that may strengthen your position, such as if you were the victim of workplace discrimination. In this case, you may be due a far bigger pay-out. Additional benefits such as a reference, outplacement services, or assistance with retraining or finding new employment may be offered too.
Ultimately, there is no exact science to calculating your severance pay. However, it should be noted that accepting it removes your right to pursue claims arising out of the termination of your employment at an employment tribunal. So, you should only accept the offer if it is a suitable level of compensation. How long it is likely to take you to secure suitable new employment will be a factor that you should take into account.
If you are in the process of receiving a Settlement Agreement offer, the great news is that it allows you to secure financial compensation and avoid future disputes by gaining legal closure. Given its importance to the transition between jobs, however, you owe it to yourself to secure fair compensation. To gain further support with all aspects of your Settlement Agreement, contact Premier Legal today