Settlement Agreements: What You Need to Know

A settlement agreement (formerly called a compromise agreement) is a legally binding contract that ends your employment and, crucially, prevents you from bringing employment tribunal claims against your employer. Once signed, you waive those rights permanently.

This makes them one of the most consequential contracts you'll ever sign. Here's what you need to know.

The legal requirements

For a settlement agreement to be valid in the UK:

• It must be in writing
• It must relate to a specific complaint or proceedings
• You must have received advice from a "relevant independent adviser" — usually a solicitor — about its terms and effect
• The adviser must be identified in the agreement and insured

The requirement for independent legal advice is a legal safeguard, not a formality. If you haven't received proper advice, the agreement may not be valid. Your employer will usually contribute to the cost of your legal advice — typically £250-500 plus VAT.

What you're giving up

Settlement agreements typically waive your right to bring claims for unfair dismissal, discrimination, unpaid wages, notice pay, holiday pay, and any other employment law claims. The specific claims waived should be listed in the agreement — read this section carefully.

Note: you cannot waive personal injury claims you're not aware of, and you cannot waive pension rights.

Is the offer fair?

There's no formula for a "fair" settlement. The value depends on:

• The strength of any tribunal claims you might bring
• Your salary and length of service (which affects unfair dismissal compensation)
• The value of any notice pay, holiday pay, and bonus owed
• The cost and stress of tribunal proceedings
• Whether discrimination is involved (uncapped compensation)

Ex-gratia payments up to £30,000 are tax-free. Statutory notice pay, holiday pay, and salary in lieu of notice are taxable.

What to negotiate

• The ex-gratia payment amount
• The reference wording (get an agreed reference letter attached)
• The non-disparagement clause (usually mutual — neither party badmouths the other)
• Outplacement support
• Timing of payment
• Any outstanding bonuses, shares, or benefits