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.

How long do you have to decide?

There is no statutory minimum period prescribed in law, but the ACAS Code of Practice on Settlement Agreements states that employees should be given a minimum of 10 calendar days to consider any offer and take independent legal advice. This 10-day period is not legally enforceable as a hard rule, but employers who put pressure on employees to sign more quickly risk having the settlement agreement set aside on the grounds of improper behaviour.

In practice, most employers allow 10–21 days. For complex agreements involving senior employees or significant sums, three to four weeks is common.

What if you need more time? Simply ask. You are entitled to request an extension, and most employers will agree — particularly if your solicitor makes the request professionally. If the employer refuses to grant any extra time and continues to apply undue pressure, document this carefully and raise it with your solicitor. It may affect the enforceability of the agreement.

The ACAS cooling-off period also serves a psychological purpose: it is designed to prevent impulsive decisions that employees later regret. If your employer is pushing you hard to sign within 24–48 hours, treat that pressure itself as a warning sign about the offer.

Can you negotiate a settlement agreement?

Yes — and in many cases you should. A settlement agreement is a commercial negotiation, and the figure your employer presents first is almost never their final position. Think of it as the opening bid in a negotiation where both parties have incentives to reach agreement.

The most common areas to negotiate include:

• The ex-gratia payment amount — This is the compensation element above your statutory entitlements. It is the most negotiable figure and directly reflects the employer's assessment of their legal risk.
• The agreed reference — A vague or merely factual reference can harm your career prospects. Push for specific positive language confirming your responsibilities, performance and the reason for departure. Get it agreed in writing as a schedule to the agreement.
• Garden leave vs. active notice — If you have a long notice period, garden leave (being paid but not required to work) is usually preferable. Confirm this explicitly in the agreement.
• Restrictive covenants — Post-termination non-compete and non-solicitation clauses can restrict your ability to work in your industry. A solicitor can often negotiate these down to shorter time periods, smaller geographic areas, or remove them entirely in exchange for other concessions.
• Confidentiality scope — Standard confidentiality clauses are reasonable, but some agreements try to prevent you discussing the situation with family or future employers. These can typically be narrowed.
• Outplacement support — Employers sometimes offer career coaching or CV support. If not offered, ask.
• Legal fees contribution — While employers must contribute to your legal costs, you can negotiate the amount upwards if your agreement is complex.

What happens after you sign?

Once you and your employer have both signed the settlement agreement, it becomes legally binding immediately. Here is what happens next:

Payment timeline. Most settlement agreements specify a payment date — typically within 14–28 days of the termination date or the date the agreement is signed (whichever is later). Check this clause carefully. If payment is not made on time, you can pursue the debt. Some agreements pay different elements on different dates (for example, notice pay on the normal payroll date, ex-gratia payment separately).

Your P45. Your employer must issue a P45 after your employment ends. This records your earnings and tax paid in the tax year to date and is needed for your next employer (or HMRC). If your settlement payment is made after your last payroll date, you may receive both a final payslip and a separate payment — make sure the tax treatment is correctly reflected in each.

The reference process. If an agreed reference is part of your settlement, make sure the agreement specifies who at the organisation will provide it and in what form. It is worth testing this once your employment ends — ask a trusted contact to request a reference and check it matches what was agreed. If it does not, you may have a breach of contract claim.

Restrictive covenants — ongoing obligations. Signing the settlement agreement confirms that any restrictive covenants in your employment contract (non-compete, non-solicitation, non-dealing) remain in force after your departure. These are legally binding and employers do enforce them, particularly for senior employees. Know exactly what restrictions apply to you, for how long, and in what geographic area before you start any new role or approach former clients.

Confidentiality — ongoing obligations. The confidentiality clauses in your settlement agreement survive the agreement itself — often indefinitely. Be mindful of what you can and cannot disclose about the circumstances of your departure, your employer's business, or the settlement terms. Breaching confidentiality can result in the employer seeking to claw back settlement payments.

Claims waived — permanent. Once signed, the claims you have waived are gone. You cannot later change your mind and bring an unfair dismissal or discrimination claim, even if you subsequently discover information that would have strengthened your position. This finality is why getting proper advice before you sign is so important.