The short answer
A settlement agreement is a voluntary, legally binding contract between an employer and an employee or worker. It records agreed terms for resolving a dispute or ending employment and normally requires the individual to waive specified claims against the employer.
Settlement agreements were previously called compromise agreements. You cannot be forced to sign one. If you do sign, the waiver can prevent you from bringing the listed claims, so independent advice is a legal requirement for a statutory settlement agreement.
When are settlement agreements used?
They commonly arise during redundancy, performance or capability concerns, grievances, disciplinary proceedings, sickness absence, workplace disputes or a negotiated exit. They can also settle a particular dispute while employment continues.
An offer does not necessarily mean the employer has acted unlawfully, and it does not by itself remove the employer’s obligation to follow any underlying fair process if no agreement is reached.
What terms are usually included?
A settlement agreement may cover:
- The termination date and reason for leaving;
- Salary, holiday pay, bonus and expenses;
- Notice worked, garden leave or payment in lieu of notice;
- Statutory or enhanced redundancy pay;
- An additional compensation or termination payment;
- Pension and benefits arrangements;
- The return of property and deletion of information;
- Confidentiality and non-derogatory statements;
- Post-termination restrictions;
- An agreed reference and announcement;
- Legal-fee contribution; and
- The claims being waived.
Every clause should be checked in context. A generous headline figure may look different after notice pay, tax, bonus, benefits and the strength of possible claims are considered.
What makes it legally valid?
The statutory conditions include that the agreement is in writing, relates to particular complaints or proceedings, identifies a relevant independent adviser and confirms the required conditions applying to that adviser.
The employee or worker must receive advice on the terms and effect of the agreement, including its effect on the ability to pursue the identified claims. The adviser must be appropriately qualified and insured.
Usually the adviser is a solicitor, although authorised trade-union officials and certain authorised advice-centre workers can also qualify.
How long should you be given?
The Acas Code states that, as a general rule, parties should be given at least 10 calendar days to consider formal written terms and receive independent advice, unless they agree otherwise.
A shorter period does not automatically invalidate an agreement, but undue or improper pressure can affect the protection given to negotiations and may create other legal issues.
Are discussions confidential?
Settlement discussions are often described as “protected conversations” or “without prejudice”, but confidentiality is not absolute.
Section 111A protection is principally concerned with ordinary unfair-dismissal proceedings and is subject to improper behaviour. It does not automatically prevent the discussion being used in every type of claim, such as discrimination or whistleblowing.
The separate without-prejudice rule generally requires an existing dispute and a genuine attempt to settle it.
Do not assume that writing “without prejudice” or “protected conversation” on an email makes every communication inadmissible.
What payments are taxable?
Salary, holiday pay, bonuses and notice pay are generally taxable as earnings. Statutory redundancy pay and qualifying termination payments can usually fall within a combined £30,000 income-tax exemption, subject to the detailed rules.
The label placed on a payment is not decisive, and post-employment notice pay rules may make part of a compensation payment taxable.
The agreement normally contains tax wording and an indemnity. Specialist tax advice may be needed for large, overseas, share-related or pension-linked packages.
What should you check before signing?
- Are the termination date and notice arrangements correct?
- Have salary, holiday, bonus, commission and expenses been calculated?
- Is the compensation reasonable compared with the alternative process and possible claims?
- When will payment be made?
- Is the reference agreed and attached?
- Are confidentiality provisions clear and lawful?
- Do restrictive covenants change or repeat the contract?
- What happens to shares, options, insurance and pension benefits?
- Are any claims expressly excluded from the waiver?
- Does the employer’s fee contribution cover the advice required?
Frequently asked questions
Can I reject the offer?
Yes. The agreement is voluntary. The employer may continue with a lawful workplace process, and tribunal deadlines can continue to run while negotiations take place.
Does signing mean I admit wrongdoing?
Not normally. Agreements commonly state that liability is not admitted.
Can I tell my family?
That depends on the clause. Agreements commonly permit disclosure to close family who agree to confidentiality, professional advisers, HMRC and where disclosure is required or protected by law.
Will my employer pay my solicitor?
Employers commonly contribute, but there is no general requirement that they pay every cost. Negotiation or wider merits advice may exceed the contribution.
Speak to The Legal Practice Solicitors
Our Employment Law team can explain a settlement agreement, check the payment and waiver provisions and advise on proposed amendments or negotiation where appropriate. We also advise employers on drafting, process and risk.
Telephone: 0208 903 7017
Email: employmentlaw@thelegalpractice.co.uk
Office: 122-126 Wembley Park Drive, Wembley Park, London HA9 8HP
Disclaimer
This article is provided for general information only and does not constitute legal or tax advice or create a solicitor-client relationship. Employment law and taxation is fact-specific and may change. Obtain advice on the individual facts before acting. The law referred to is the law of England and Wales and is stated as at 26 August 2026.
