Settlement Agreements – the basics

What is a settlement agreement?

A settlement agreement (until 2013, known as a “compromise agreement”) is a legally binding document under which an employee agrees to sign away certain statutory employment claims against their employer, usually in return for a compensation payment. It is one of only two ways (the other being through ACAS) that such statutory claims may be waived. To be valid, a settlement agreement must meet certain statutory conditions. These include that it must be in writing and relate to a particular complaint or proceedings, and the employee must have received independent legal advice.

Can I choose my own independent legal adviser?

Yes, you are entitled to choose your own adviser. The only requirement is that they must be a “relevant independent adviser”, usually a qualified solicitor, and insured to give advice.

Will I be giving up all my rights / claims?

By signing a settlement agreement, you will be signing away your employment rights and claims. That said, there is a small number of claims you may still be able to pursue even after signing the settlement agreement. These include claims in relation to accrued pension rights and personal injury.

Are settlement discussions off-the-record?

Yes, in the following circumstances. The parties may not refer to any pre-settlement discussions in evidence before the court or tribunal if:

  • the discussions are held “with a view to [the employment] being terminated on terms agreed between the employer and the employee”, often referred to as “protected conversations”; or
  • where a dispute has already arisen, the discussions are made on a “without prejudice” basis.

How should any compensation be calculated? 

There is no fixed formula for calculating compensation for loss of employment. Whilst statutory redundancy pay is calculated by reference to age and length of service, any compensation paid under a settlement agreement will usually be a matter for negotiation.

Ultimately, each case will depend on its own facts, and it will be important to get the right advice if you are not to sell yourself short.

Will the settlement be paid tax free?

It depends. Any payments treated as “earnings”, including salary, commission, notice pay and holiday pay, would normally be subject to income tax and national insurance. Compensation for loss of employment or redundancy pay, on the other hand, would normally be paid tax free up to £30,000.

Will my employer cover my legal fees?

The employer usually agrees to make a contribution towards legal fees, tax free, under the terms of the settlement agreement.

Is the agreement confidential?

Yes, the fact and terms of the settlement agreement will usually be stated to be confidential.

Can I agree a reference?

Yes, as part of any settlement, the employee will often agree the terms of a reference and, sometimes, an announcement. These can be annexed as schedules to the draft settlement agreement.

With over 40 years’ collective experience, we have advised on thousands of settlement agreements and will always try to get the best deal we can for our clients.

If you have been offered a settlement agreement, and need reliable, timely advice, get in touch with our specialists now: or

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