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Oct 2020

What is a Settlement Agreement?

Have you been offered a settlement agreement? What is it? Why should I enter into one? What does it mean? Do I need a solicitor? We detail all you need to know about settlement agreements in our Settlement Agreement Q&A session.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employee and employer,  which requires the employee to waive their rights to bring an employment claim against their employer. This is done in return for some form of compensation for the employee usually on termination of employment, providing both parties with a clean break. Prior to 29 July 2013, this agreement was known as a “compromise agreement”.

Why enter into a settlement agreement?

A settlement agreement can be negotiated to reach a mutually agreed set of terms between both parties. Often a settlement agreement will offer an employee more on termination of employment than statutory redundancy pay and contractual entitlements. An employee may enter into a settlement agreement to secure financial compensation for conduct they have been subject to in the workplace and to expedite a conclusion to a dispute ahead of litigation. Employment proceedings against an employer can be time consuming, costly, uncertain and may add to stress or anxiety already being experienced.

What is a typical outcome of a settlement agreement?

Terms are likely to vary depending on the specific employment circumstances, however the outcome might be to obtain a good reference, a letter of apology, reinstatement or most commonly an agreed ex gratia compensatory sum (financial payment). The amount of compensation offered can depend on various factors such as the prospects of the claims being compromised in the agreement, the employees’ salary, length of service and how quickly they will be able to mitigate their losses, i.e. secure a new job at the same salary level.

Is tax payable on compensatory sum?

Under a settlement agreement the first £30,000 of any non-contractual compensation received in relation to loss of office is tax-free. This excludes payments that are contractual such as remaining salary payments, payments in lieu of holiday and payments in lieu of notice.

Do I need to use a solicitor?

It is essential to obtain ‘independent legal advice’ from a ‘relevant independent adviser’ (such as a solicitor or certified trade union) for a settlement agreement to be valid. The reason for this is that a settlement agreement waives your rights to bring an employment claim against your employer and therefore must be certified. This often affects rights to claims such as discrimination, unfair dismissal, breach of contract, harassment, whistleblowing, injury to feelings and many more. However, an employer cannot waive an employee’s right to bring claims in relation to accrued pension rights, personal injury claims that are caused or identified after the signing of the settlement agreement, right to bring a claim for breach of contract under the settlement agreement or certain statutory employment rights claims which can only be settled through Acas.

An employment solicitor will also be able to identify any other potential claims you might have against your employer, advise you on the strength of your case and effectively negotiate terms to your settlement agreement such as leveraging up the package (depending on your potential claims), requesting withdrawal of terms or redefining restrictive clauses such as post-termination restrictions. Caution should be taken if you attempt to engage in negotiations yourself, as you may effectively be asserting a counter-offer which could result in the employer withdrawing the settlement agreement in its entirety.

Who pays for legal advice?

As it is essential for an employee to obtain legal advice in relation to settlement agreements, reasonable legal expenses incurred by the employee in obtaining the legal advice is usually covered by the employer. This will often be specified in your settlement agreement along with details on the expenses which will be covered.


Our employment team can advise on any potential claims you might have against your employer and help you successfully negotiate a settlement agreement.

If you need assistance or advice on the contents of this article, please contact Thackray Williams LLP who have set up a FREE Legal Advice Line to businesses and employees in the wake of COVID-19. Do get in touch on 020 8663 4127 if you wish to discuss this matter in more detail or require any further advice.

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