What is a Settlement Agreement?

Definition: what is a settlement agreement?

A settlement agreement (previously called a compromise agreement) is a legally binding contract between an employer and an employee. Under it, the employee agrees to waive (give up) their right to bring employment tribunal claims against the employer in exchange for a financial payment and sometimes other benefits.

Settlement agreements are governed by the Employment Rights Act 1996 and sections of the Equality Act 2010. For a settlement agreement to be legally valid, a number of strict conditions must be met — most importantly, the employee must receive independent legal advice from a qualified adviser (almost always a solicitor) before signing.

When do employers offer settlement agreements?

Employers offer settlement agreements in a wide range of situations, including:

• Redundancy — Often paired with or instead of a formal redundancy process
• Unfair dismissal risk — Where the employer has concerns about whether a dismissal would withstand tribunal scrutiny
• Performance management — Where the employer wants to avoid a lengthy performance improvement process
• Disciplinary proceedings — To resolve a situation before a final hearing
• Discrimination or harassment allegations — To resolve disputes discreetly
• Restructuring or role elimination — Even if the employer calls it redundancy, they may use a settlement agreement to ensure no claims arise
• Senior departures — Directors and senior employees often leave under negotiated settlement agreements

The common thread: the employer wants certainty that no employment tribunal claim will follow. They pay for that certainty.

What does a settlement agreement contain?

A typical settlement agreement will include:

• The financial payment being made (broken down by type: notice pay, redundancy, ex-gratia, etc.)
• A list of employment claims you are waiving — usually a very long list covering every conceivable claim under UK employment law
• Confidentiality clauses (often requiring you not to discuss the settlement or the circumstances of your departure)
• A "non-disparagement" clause (you agree not to make negative comments about the employer)
• An agreed reference — often a standard factual reference
• Return of company property
• Restrictive covenants (if any) from your employment contract, confirmed as still in effect
• Confirmation that the employer will pay your reasonable legal fees for advice on the agreement

What do you give up?

This is the critical point. By signing a settlement agreement, you are typically waiving the right to bring claims including:

• Unfair dismissal
• Wrongful dismissal (breach of contract)
• Discrimination (race, sex, disability, age, religion, sexual orientation)
• Whistleblowing / protected disclosure claims
• Equal pay claims
• Claims for unpaid wages, holiday pay, bonuses or commission
• TUPE claims

Once you sign, those rights are generally extinguished permanently. This is why independent legal advice is not just helpful — it is a legal requirement for the agreement to be valid.

Legal requirements for a valid settlement agreement

Under section 203 of the Employment Rights Act 1996, a settlement agreement is only valid if all of the following conditions are met:

1. The agreement must be in writing
2. It must relate to a particular complaint or proceedings
3. The employee must have received advice from a relevant independent adviser (a qualified solicitor, barrister, certified trade union official, or certified advice centre worker)
4. The adviser must have professional indemnity insurance
5. The agreement must identify the adviser
6. The agreement must state that the conditions are satisfied

If any of these conditions are not met, the settlement agreement will be unenforceable — meaning you could still bring tribunal claims despite having signed it.

Who pays for the legal advice?

Your employer is legally required to contribute to the cost of your independent legal advice, and in practice, almost all employers pay the full cost. The typical contribution is £350–£750 + VAT for a standard settlement agreement review, though complex cases may cost more.

This is one of the most important things to understand: getting a solicitor to review your settlement agreement effectively costs you nothing in the vast majority of cases. There is no reason not to get proper advice.

How long do you have to consider a settlement agreement?

There is no statutory minimum period, but the ACAS Code of Practice on Settlement Agreements recommends that employees are given at least 10 calendar days to consider the offer and take advice. Employers who put you under undue pressure to sign quickly may be in breach of the code.

Can you negotiate?

Yes — and you often should. Settlement agreements are negotiated documents. Your employer's first offer is rarely their best offer. Common areas to negotiate include:

• The ex-gratia payment amount
• The wording of your reference
• Restrictive covenants (can you get them removed or shortened?)
• Garden leave vs active working during notice
• Outplacement support

Without prejudice conversations

Employers often initiate settlement discussions by having a "without prejudice" conversation or issuing a "protected conversation" under section 111A of the Employment Rights Act 1996. This means the conversation is (in most circumstances) inadmissible in employment tribunal proceedings — allowing both sides to discuss settlement frankly without it being used against them later.

Note: the protection does not apply if there has been improper behaviour (e.g. harassment or undue pressure) by either party.