The short version
A settlement agreement is a legally binding contract between you and your employer in which you agree not to bring specified claims against them — usually in return for a payment. It is the only way, apart from an Acas COT3, that you can validly give up statutory employment rights such as unfair dismissal or discrimination claims.
It is normally used when employment is ending: a redundancy the employer wants to close off cleanly, a performance or conduct issue both sides would rather resolve quietly, or a workplace dispute that neither side wants to take to a tribunal. It can also be used while employment continues, to settle a specific grievance.
What the law requires
Under section 203 of the Employment Rights Act 1996, a settlement agreement is only binding if it meets strict conditions:
- it must be in writing
- it must relate to a particular complaint or particular proceedings — a general waiver of “all claims” without specifics may not be effective
- you must have received advice from a relevant independent adviser on the terms and their effect, and specifically on your ability to bring a tribunal claim
- that adviser must be identified in the agreement and covered by professional indemnity insurance
- the agreement must state that these conditions are satisfied
This is why your employer will insist you take advice, and why they will usually contribute towards the cost of it.
What is normally in it
A typical agreement covers the termination date; the compensation payment; how notice is dealt with; accrued holiday and outstanding pay; the treatment of any bonus, commission, shares or pension; the return of company property; a confidentiality clause; a non-derogatory comments clause; an agreed reference; and the list of claims being waived.
Some rights cannot be signed away — accrued pension rights, personal injury claims you do not yet know about, and the right to enforce the agreement itself.
Tax
The first £30,000 of a genuine compensation payment for loss of employment can usually be paid free of tax and National Insurance. Notice pay, holiday pay, outstanding salary and contractual bonuses are taxable in the normal way, whatever they are called in the agreement. The agreement should set out clearly which parts are which, and will normally include a tax indemnity from you.
Before you sign
You do not have to accept the first offer. The terms — the payment, the reference, the length of restrictive covenants, the wording of an internal announcement — are all negotiable, and an adviser who reads these regularly will spot what is missing. Note too that reforms to confidentiality clauses in harassment and discrimination cases are expected under the Employment Rights Act 2025, though they are not yet in force.
Talk to us
We advise on settlement agreements for both employees and employers across the North West. Call 0151 422 0982.