Your Settlement Agreement Solicitor

The Settlement Agreement Solicitor

Episode 6: What Types of Payments Are Typically Included in a Settlement Agreement?

Hello and welcome back to The Settlement Agreement Solicitor, the podcast that takes you through the ins and outs of settlement agreements with clarity, guidance, and a bit of common sense. I’m your host, Geoffrey Caesar, a solicitor with over 20 years of experience helping clients negotiate and understand these often-complex legal documents.

Today, in Episode 6, we are tackling a question at the heart of most settlement agreements: What types of payments are typically included in a settlement agreement?

Whether you are considering signing one or you are right in the thick of negotiations, understanding the payments you’re entitled to—and ensuring that they’re fair—is absolutely critical.

So, we are going to walk through each type of payment you might encounter, and I will also provide some practical tips to ensure you don’t miss out on anything. Let’s get into it.

1. Your Regular Pay Up to the End of Your Employment

Let’s start with something that might seem straightforward but is often an overlooked detail: your regular pay. This includes any salary, wages, holiday pay, or benefits you’re entitled to up to your official end date. This must be clearly spelled out in your agreement.

One point to check is whether you are still on the payroll during a notice period or continuing to accrue holiday pay or pension contributions. These small details can add up, and it’s worth clarifying exactly what your entitlement is, especially if you are expected to remain “on garden leave” until your final day.

If you have taken any accrued holiday that exceeds your entitlement, the company may deduct that from your final payment, which is another thing to watch out for. But remember, the core of this section is simple: make sure you are paid what you are owed.

2. Payment in Lieu of Notice (PILON)

Next, we have Payment in Lieu of Notice, or PILON, as it is often abbreviated.

PILON can be a very useful tool, especially if you and your employer want to avoid a long, drawn-out exit. But how does it work?

Instead of requiring you to work through your notice period, your employer pays you what you would have earned had you worked. Simple, right? Well, not always.

Make sure you know whether PILON is in your contract. Some contracts include it as an option for the employer, but others might not. If it’s not included in your contract, your employer could be in breach of contract by paying PILON without agreement, which means you may be entitled to more compensation.

PILON is usually subject to tax and National Insurance deductions, unlike certain termination payments we shall discuss in a moment. It is important to ensure that this has been calculated properly and that you’re not losing out through incorrect deductions.

If your contract of employment does not contain a PILON clause then, if your employer requires you to not work your notice period, the payment they make instead of you working your notice period is effectively a payment for breach of contract, which means that the first £30,000 can be paid free of tax and national insurance deductions.

This brings us onto the third type of payment.

3. Termination Payments: Ex Gratia and More

Now, let’s move on to one of the most crucial components of any settlement agreement—the termination payment. This is the lump sum that many employees focus on, and for good reason. It is often the most significant payment you will receive as part of the settlement.

One key term here is ex gratia, meaning ‘out of goodwill’. Ex gratia payments are discretionary payments made by your employer, usually to compensate you for the loss of your job. These payments are often seen as a goodwill gesture to smooth the transition out of the company.

Here is where it gets interesting. Termination payments, including ex gratia sums, can often be paid tax-free up to £30,000 in the UK. This is a real advantage, as you can receive a significant lump sum without tax being deducted, provided the payment is structured correctly. But remember, any amount over £30,000 will be subject to tax, so it’s vital to check how that is calculated.

If your agreement refers to "compensation for loss of employment," ensure the amount is clear. I have seen agreements that do not adequately specify the breakdown, leading to later confusion. Clarity is key. Never be afraid to ask your employer for a full breakdown of the figures.

4. Bonuses, Shares, and Long-Term Incentive Plans (LTIPs)

Next, we come to bonuses, shares, and long-term incentive plans—often the most complex part of any settlement agreement, especially for senior employees or those in sectors with a performance-based pay structure.

Let’s start with bonuses. If you’ve earned a bonus or are partway through a bonus year, it’s essential to negotiate how this will be handled. Some employers may be reluctant to pay a bonus if your employment is ending, but you should argue that if you’ve met your targets or KPIs for that period, you are entitled to what’s fair.

Then, there are shares or share options. If you are part of a scheme where shares have been awarded or promised, it is important to establish what happens to these when you leave. Do you retain them? Are they vested? Or do you lose them entirely? This is a highly specialised area, and the terms can vary greatly, so ensure this is crystal clear in your agreement.

Long-term incentive plans, or LTIPs, usually work over several years. If you’re partway through such a plan when your employment ends, you’ll need to negotiate whether any payments will still be made and, if so, when. Sometimes, your eligibility can depend on when you leave, so the timing here can be everything.

5. Compensation for Post-Employment Restrictions and Confidentiality Clauses

Finally, let’s discuss compensation for post-employment restrictions and confidentiality clauses. If your settlement agreement includes restrictions, such as non-compete clauses, non-solicitation of clients, or agreements not to poach staff, you should consider negotiating compensation for these.

Why?

These restrictions could limit your ability to work in your industry or field for months, even years, which has a financial impact. If your employer is asking for such restrictions, it is reasonable to request additional compensation to reflect the burden of these limitations.

Confidentiality clauses are another common feature, and again, they can impact your ability to discuss your time at the company or even the fact that a settlement agreement exists. These clauses are often quite strict, so it’s worth discussing the scope with your solicitor and ensuring you are comfortable with what you are agreeing to, and being compensated accordingly.

Final Thoughts and Key Takeaways

There you have it: settlement agreements typically cover regular pay, PILON, termination payments, bonuses and shares, and compensation for post-employment restrictions. Each of these is negotiable, and each plays a critical role in ensuring you leave your employment with the financial compensation and security you deserve.

One final word of advice: never rush into signing a settlement agreement without seeking professional advice. Each agreement is different, and what’s included, or left out, can have a significant impact on your financial future. That is where having an experienced solicitor by your side pays off.

I’m Geoffrey Caesar, and this has been the Settlement Agreement Solicitor. If you’ve found this episode helpful, subscribe and share with anyone else who might benefit from my advice.

Thank you for listening. Stay informed and stay empowered.