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Settlement Agreements- What’s it worth?

August 2021

With Furlough coming to end soon employers may think of downsizing their workforce in the short-term so I’ve prepared this note to help with the discussion process. Settlement Agreements are legally binding contracts allowing employers and employees to part company safely. They offer certainty, tax efficiency and very importantly closure but the sticking point is often - what’s it worth?

With Furlough coming to end employers may think of downsizing their workforce so I’ve prepared this note to help with the discussion process.

Settlement Agreement are legally binding contracts allowing employers and employees to part company safely. They offer certainty, tax efficiency and closure but the sticking point tends to be - what’s it worth?

What matters most is net benefit. If the offer is £20,000 is a tribunal claim worth £35,000 worth pursuing if it takes a lengthy and public process, months of stress and legal costs? People tend to be more interested in a fight early on but with time, they start to think about the realities and what they really want. Old disputes start to get in the way of fresh opportunities.

The job market appears to be picking up with an estimated 953,000 job vacancies in May to July 2021, a record high, having grown by 290,000 compared with the previous quarter… so focusing on the future is probably the best approach.

In negotiations you must be realistic- no point assuming you’ll get 100% of what you want.

This summary sets out things which tend to crop up when I’m advising on settlements. It’s prepared on a neutral basis so both employers and employees can use it. I’ve included summaries on annual awards in the tribunals, up to date ‘Vento’ guidelines (annual injury to feelings awards in discrimination) and the statutory maximum Unfair Dismissal awards as at April 2021.


Unfair Dismissals

An employee usually needs 2 years’ service and a clear basis for alleging unfairness. A tribunal will look at all the circumstances to decide if the employer has behaved reasonably.

Dismissals can be procedurally unfair (the basic procedures are warnings, a fair meeting and an appeal as set out in the ACAS Code (1)) but for large compensation awards there has to be actual unfairness…if the employee would have been dismissed anyway a procedural award might only result in a few weeks’ pay.

There are 2 main financial awards: Compensatory and Basic. The Compensatory Award is for lost earnings capped at one year’s pay (upper limit £89,493) and the Basic Award- one week’s pay for each year worked (capped at £544 for each year worked under the age of 41 and £816 for each year worked over age 41) with a total cap of 20 years’ service. The Basic award is the same as a redundancy payment, so an employee who has been paid for redundancy will not get also get the Basic Award.


Other things to think about:

  • Mitigation- A tribunal will expect an employee to look for work (mitigation). This will depend on the type of work (secretarial jobs are always in high demand but travel jobs may be harder to find at present), the age of the employee and things like medical conditions and the reason for dismissal are also relevant. A neutral reason (redundancy) will not hold an employee back, but misconduct or capability dismissals will make finding a job difficult. An employee should have some evidence of hardship (Internet searches/specialist analysis/medical) if they want to raise this.


  • Employer help- Employers should help the employee find a new job. A good reference or an offer to contribute to outplacement will reduce the period of likely unemployment.


  • Tax efficiency – genuine compensation (ie: non-contractual payments) can be tax free up to £30,000 but tribunal payments (except injury to feelings) are taxable.


  • Reputations - Settlement Agreements protect reputations (confidentiality, references, no derogatory comments, announcement) but Tribunal decisions are readily available online so even if an employee wins, this may present future problems.


  • Contribution – when an employee has contributed to the dismissal in some way tribunals can reduce the award by anything up to 100%.


  • Polkey reductions - compensation can be reduced when an employee would have been dismissed in any event (eg. if a proper procedure had been followed the same outcome would have been reached). Another example is when an employee is dismissed unfairly for misconduct but would have dismissed anyway in a redundancy programme.


  • Legal costs – ‘no win no fee lawyers’ tend to charge 33% of sums recovered and hourly rates can easily run into thousands of pounds. Costs are not recoverable in tribunals but with a Settlement Agreement the employer pays the legal fee.


  • Amount of income - an employee earning in excess of the maximum award may find it easier to secure the maximum at tribunal but an employee on £30,000 may only get £15,000 if the tribunal find that 6 months was time to find a job. The average award for Unfair Dismissal in 2020 was £10,812 considerably less than the maximum…



There’s no qualifying period for discrimination claims and awards in sex, race, disability, sexual orientation, religion and belief or pregnancy cases tend to be higher because there’s no upper cap on lost earnings and awards can be made for ‘Injury to feelings’ (including stress) and ‘Aggravated’ damages (where an employer has acted very unfairly in the procedure).

An apology/good reference etc. can be included in the settlement as can referral to a stress counsellor.

Here is guidance from the Employment Tribunal records on maximum and average discrimination awards in 2020:


Type of discrimination

Maximum award £

Average award £










Religion and belief

No awards made

No awards made




Sexual orientation




Injury to feelings

In discrimination and ‘whistleblowing’ type cases an award can be made on top of lost earnings for the hurt or stress caused, applying the Vento guidelines last updated on 6th April 2021.


Lower Band (less serious cases)

£900 to £9,100

Middle Band (for cases which do not merit the Upper Band)

£9,100 to £27,400

Upper Band (most serious cases)

£27,400 to £45,600


Issues leading to higher ‘injury to feelings’ awards:

  • How seriously has the Claimant been treated/affected? Duration of discrimination etc.
  • Causing or worsening a medical condition.
  • Nature of the employee’s job and the effect on their career.
  • How grievances have been addressed.
  • Has the employee been subjected to humiliating conduct such as a fake disciplinary or victimisation…or ignoring a grievance/ trivialising their complaint?

Protected Conversations

Discussions about a settlement can be held in a ‘protected’ conversation which cannot be used in a legal case.

A good way to start a Protected Conversation is to use neutral words such as ‘dignified exit’ whilst making the employee’s rights during the proposed conversation clear. It’s important to make sure that the process is fair with no suggestion that the employee is being intimated and to keep good records.

Here’s a copy of ACAS’ Code of Practice (4) on Settlement Agreements which sets out good practice.

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