Settlement Agreements
A settlement agreement is a legally binding contract between you and your employer that sets out the terms on which your employment will end. In exchange for agreed payments or benefits, you may agree to give up certain legal claims against your employer.
Settlement agreements can be appropriate in a range of situations, including when a work relationship is ending, during redundancy, or when resolving a workplace dispute without going to an Employment Tribunal.
This page explains what settlement agreements are, how they work, and what you should consider before signing one.
What Is a Settlement Agreement?
A settlement agreement (formerly known as a “compromise agreement”) is a written document that:
- records the terms on which your employment ends
- sets out any payment or benefits you receive
- identifies the legal claims you agree to waive
- is signed by both you and your employer
Settlement agreements can provide closure and certainty where disputes may otherwise lead to tribunal claims. They are voluntary and must meet specific legal conditions to be valid.
Legal Requirements for Settlement Agreements
For a settlement agreement to be legally binding and enforceable:
Independent Legal Advice
You must receive independent legal advice on the terms and effects of the agreement with respect to the claims you are giving up. This advice must be given by a qualified adviser (usually a solicitor) and your employer will typically pay for that advice.
Written Form
The agreement must be in writing and clearly identify the rights and claims you are agreeing to waive.
Specifically Identified Claims
It must specify the classes of claims being waived (e.g., unfair dismissal, discrimination, redundancy pay claims). A general or blanket waiver is not enforceable.
Voluntary and Informed
You must enter the agreement voluntarily, without duress or undue influence.
When these conditions are met, a settlement agreement bars the claims you have agreed to waive and offers certainty about the end of the employment relationship.
When Are Settlement Agreements Used?
Settlement agreements may be appropriate in several situations, including:
- ending a redundancy situation with enhanced payment
- resolving a workplace dispute before tribunal proceedings
- where there is a risk of an employment claim
- when both sides wish to separate amicably
- to provide enhanced terms beyond statutory entitlements
Settlement agreements can be an alternative to tribunal litigation, and can provide benefits such as confidentiality and agreed reference wording.
Negotiating a Settlement Agreement
A settlement agreement is negotiable. Depending on the circumstances, you may wish to negotiate:
- a higher compensation figure
- enhanced notice terms
- extended benefits
- agreed references
- the scope of claims being waived
You should not sign a settlement agreement without fully understanding its implications. Independent advice ensures you are informed about your rights and potential losses you might be asked to waive.
What If You Change Your Mind?
A settlement agreement is binding once signed and you generally cannot revoke it unless the terms allow for it or there has been misrepresentation, mistake, undue influence, or other legal defect.
Before signing, make sure you are clear about every term and the claims you are agreeing to give up.
How We Can Help
Our solicitors can assist you with:
- reviewing settlement agreement terms
- advising on whether offers are fair and reasonable
- explaining the claims you would be waiving
- negotiating better terms with your employer
- providing statutory advice required for enforceability
We provide clear, pragmatic guidance to help you understand your options and protect your interests.
Frequently Asked Questions
Do I need a solicitor for a settlement agreement?
Yes. Independent legal advice is legally required for a settlement agreement to be enforceable.
What does a settlement agreement waive?
It waives specific statutory and contractual claims you agree not to bring, which must be clearly identified in the document.
Is settlement pay always tax-free?
Not always. Compensation for loss of employment may be tax-free up to £30,000, but other elements (like notice pay) are usually taxable.
