Settlement Agreement Advice: What to Check Before Signing

A settlement agreement is a written, legally binding, voluntary contract that settles an employment dispute, such as a possible tribunal claim. It used to be called a 'compromise agreement'. In return for a payment you usually give up the claims it names.

A settlement agreement can include a financial payment, an employment reference, an agreement not to make a claim to an employment tribunal and a confidentiality clause.

• It waives your right to bring the claims it specifically covers in a court or employment tribunal
• It usually includes a payment from your employer and may include a reference
• To be legally valid, you must get advice from a relevant independent adviser on how the agreement affects your right to make a claim
• The agreement must name your adviser, and the adviser must be insured in case you suffer any loss as a result of their advice
• It is legally binding, and if either side breaks its terms that is a breach of contract
• It is voluntary, so you do not have to agree to one

Yes. To be legally valid, you must get advice from a relevant independent adviser on how the agreement affects your right to make a claim. The adviser must not be employed by or acting for your employer. The agreement must name your adviser, and the adviser must be insured in case you suffer any loss as a result of their advice.

Your employer does not have to pay for your advice, but Acas says it should consider offering to, because that helps make sure you get the advice you need. If your employer pays your solicitor directly for legal costs related to the settlement, you do not pay tax or National Insurance on that.

Check that the agreement shows a breakdown of the payments and any deductions for tax and National Insurance, states the specific legal claims it covers, and names your adviser.

Also look for these points in the draft. Our References guide covers what an employer can say in a reference.

• A breakdown of the payments and amounts, with any deductions for tax and National Insurance
• The specific legal claims it covers, because it cannot simply say it settles all claims
• Agreed wording for a reference, if your employer agrees to give one
• A confidentiality clause, which is voluntary
• A clause about derogatory (critical or disrespectful) comments, if both sides agree to one
• An end date for your employment, either at the end of your notice period or on an agreed date
• Whether confidentiality clauses or restrictive covenants already in your contract stay binding after your employment ends
• A payment towards your legal fees, if your employer chooses to make one

Some parts are taxable and some are not. You do not usually pay tax on the first combined £30,000 of statutory redundancy pay, additional severance or enhanced redundancy payments, and non-cash benefits such as company property you keep. Unpaid wages, holiday pay, bonuses and payments instead of working your notice are taxed as earnings.

• You do not usually pay tax on the first combined £30,000 of statutory redundancy pay, additional severance or enhanced redundancy payments, and non-cash benefits such as company property you keep
• You pay tax on any amount over that combined £30,000, and your employer pays employer Class 1A National Insurance on it
• Unpaid wages, holiday pay, bonuses and payments for agreeing to a restrictive covenant are taxed as earnings, with National Insurance
• Payments you get instead of working your notice, including payment in lieu of notice (PILON), pay on gardening leave and any part of a termination payment treated as Post-Employment Notice Pay (PENP), are taxed as earnings
• You do not pay tax on legal costs related to the settlement that your employer pays directly to your solicitor, or on a termination payment you get because of an injury, illness or disability that stops you doing your job

Yes. You can negotiate and make a counter offer, and you do not have to accept the terms first proposed.

• You and your employer should agree the financial payment, which can include compensation for agreeing not to make a tribunal claim and pay for holiday you have not taken
• Other terms can be agreed too, including the wording of a reference and the date your employment ends
• There is no legal right to be accompanied to a settlement agreement meeting, but Acas says it is good practice to let you bring a colleague or a trade union representative
• Settlement discussions are confidential and are sometimes called protected conversations, and they usually cannot be used as evidence in an employment tribunal or another court

The Acas guidance and Code used for this guide give no figure for a reasonable payment. Your adviser must advise you on the terms and effect of the agreement and, in particular, its effect on your ability to pursue your rights before an employment tribunal, so ask them how the offer compares with the claims you could bring.

Employers should give you a reasonable amount of time to consider the written offer and get independent advice. As a general rule the Acas Code recommends at least 10 calendar days, unless the parties agree otherwise. Employers must make reasonable adjustments for someone who is disabled, so you may need longer, for example if you need a sign language interpreter to get advice.

You are not obliged to sign a settlement agreement. See our Unfair Dismissal guide for who can claim.

• If no agreement is reached, an employee may still bring a claim to an employment tribunal. If the claim is for unfair dismissal, the section 111A confidentiality rules apply to the settlement discussions
• Evidence of pre-termination negotiations is inadmissible in an unfair dismissal complaint under section 111A of the Employment Rights Act 1996, and where something said or done was improper the rule applies only to the extent the tribunal considers just
• Section 111A does not cover claims for an automatically unfair reason, such as whistleblowing, union membership or asserting a statutory right, or claims such as discrimination, harassment or victimisation under the Equality Act 2010
• In claims other than unfair dismissal, the without prejudice principle can apply where there is an existing dispute at the time of the settlement offer, so the discussions are not admissible unless there has been some unambiguous impropriety
• The parties cannot rely on the offer or the discussions as part of a performance management, disciplinary or grievance process
• Employers should follow a fair process, because if you are dismissed afterwards, failing to do so could be grounds for an unfair dismissal claim
• Undue pressure counts as improper behaviour, for example an employer saying before any disciplinary process has begun that you will be dismissed if you reject the proposal
• Only an employee would be eligible to make a claim for unfair dismissal, and the claims you can make depend on your employment status

A settlement agreement can only waive the claims it specifically covers. It cannot:

• ✗No: Settle all claims without naming them: an agreement that says it is in full and final settlement of all claims is not valid
• ✗No: Waive a claim it does not specifically cover
• ✗No: Exclude or limit your rights under the Employment Rights Act 1996, because any provision that purports to do so, or to stop a tribunal claim under it, is void, unless an exception in section 203 applies, such as an agreement that meets the conditions regulating settlement agreements
• ✗No: Exclude or limit your rights under the Equality Act 2010, because a contract term that purports to do so is unenforceable, unless the contract is a qualifying settlement agreement or was made with the assistance of a conciliation officer
• ✗No: Stop you making a protected disclosure, because any provision in an agreement is void so far as it purports to preclude a worker from making one
• ✗No: Stop you reporting a crime to the police, or sharing information about a crime to get advice and support if you are a victim of crime in England or Wales, because an employer cannot use a confidentiality clause to stop that