Settlement Agreements: What They Are and Why You Need a Solicitor

Reviewed 30 October 2026 · England and Wales · General information, not legal advice

A settlement agreement is a binding contract in which you give up employment claims in return for a payment and other terms. It is valid only if you have had independent legal advice, which the employer usually pays towards.

A settlement agreement is a legally binding contract between you and your employer in which you give up the right to bring specified employment claims, usually in return for a termination payment, an agreed reference and other promises. It is only valid if it meets the conditions in section 203 of the Employment Rights Act 1996, the most important being that you have received advice on its terms and effect from an independent adviser, normally a solicitor, which is why the employer offers to pay towards that advice. This guide explains when agreements are used, what makes them binding, what the clauses mean, how the money is taxed, how to negotiate and how a settlement compares with a tribunal claim in England and Wales.

When settlement agreements are used

Employers use settlement agreements whenever they want certainty that an employee will not sue. The common situations are a redundancy where an enhanced payment is offered in exchange for a clean break, a performance or conduct process that both sides would rather end by agreement, a breakdown in the working relationship, the resolution of a grievance or discrimination complaint, and the settlement of a tribunal claim that has already been issued. Employees sometimes start the conversation themselves, particularly when they are considering resigning and claiming constructive dismissal and would prefer a negotiated exit.

Until July 2013 these documents were called compromise agreements, and older contracts and handbooks still use the term. A settlement reached through an Acas conciliator is recorded instead on a COT3 form, which is equally binding but does not require independent legal advice.

What makes an agreement legally binding

Normally an employee cannot sign away statutory employment rights; any attempt to do so is void. Section 203(3) of the 1996 Act, with matching provisions in section 147 of the Equality Act 2010 and section 288 of the Trade Union and Labour Relations (Consolidation) Act 1992, creates the exception, and every condition must be met:

1. The agreement must be in writing.
2. It must relate to the particular complaint or proceedings being settled. A bare waiver of "all claims" is not enough; agreements therefore list the claims by name and statute.
3. You must have received advice from a "relevant independent adviser" on the terms and effect of the agreement and, in particular, on its effect on your ability to pursue a claim in an employment tribunal. The adviser can be a qualified lawyer, a certified trade union official or a certified advice centre worker, and must not be acting for the employer.
4. The adviser must be covered by professional indemnity insurance, or an equivalent professional indemnity, against the risk of a claim by you.
5. The agreement must identify the adviser and state that the statutory conditions are satisfied.

If any condition fails, the waiver of statutory claims is void and you could still bring the claim, although contractual claims might remain settled. Some rights are usually excluded from the waiver: claims to enforce the agreement itself, accrued pension rights and personal injury claims you are not yet aware of.

Protected conversations and without prejudice discussions

Employers worry that offering a settlement will be used against them as evidence that they had already decided to dismiss. Two rules allow frank discussion. The common law "without prejudice" rule keeps genuine attempts to settle an existing dispute out of evidence, but it only applies once there is a dispute, so it does not cover an employer approaching a contented employee out of the blue.

Section 111A of the 1996 Act, in force since 29 July 2013, fills that gap. A "pre-termination negotiation", widely called a protected conversation, cannot be referred to in an ordinary unfair dismissal claim even where no dispute existed beforehand. The protection has limits: it does not apply to discrimination, whistleblowing, automatically unfair dismissal or breach of contract claims, and it is lost where there has been "improper behaviour", such as threats, harassment, discrimination or undue pressure. The Acas Code of Practice on Settlement Agreements says employees should be given a reasonable time to consider a written offer, with ten calendar days as the minimum unless both sides agree otherwise, and that being accompanied at any meeting is good practice although not a legal requirement.

What a settlement agreement usually contains

Agreements vary in length and complexity, but most contain the same elements.

• The termination date and how you will be paid up to it, including salary, benefits and accrued but untaken holiday.
• Notice: whether you work it, are placed on garden leave or receive a payment in lieu. Pay for any notice not worked is taxed in full as "post-employment notice pay" under rules that have applied since 6 April 2018, whether or not your contract has a pay in lieu clause.
• The termination payment, often described as compensation for loss of employment or an ex gratia payment, usually paid within a few weeks of the termination date.
• Any enhanced or statutory redundancy payment, bonus or commission, and what happens to share options, pension contributions and private medical cover.
• An agreed reference, usually attached as a schedule, and sometimes an agreed internal and external announcement.
• Confidentiality clauses covering the terms of the agreement and the circumstances of your departure, and mutual non-derogatory clauses.
• Reaffirmation of restrictive covenants from your contract, or new ones, limiting who you can work for or approach after you leave.
• Warranties from you: that you have no other claims, have not been offered another job, have returned company property and have not committed misconduct that would have justified dismissal, often backed by a clawback clause.
• A tax indemnity under which you repay any tax or National Insurance that HM Revenue and Customs later demands on the payments.
• The employer's contribution to your legal fees, paid directly to your adviser against an invoice.

Confidentiality clauses have legal limits. Section 43J of the 1996 Act makes void any term that stops you making a protected disclosure to a regulator, and agreements should say expressly that you can report crime to the police, co-operate with regulators, speak to medical and legal advisers, and tell your immediate family the terms. From September 2027, under the Employment Rights Act 2025, clauses that prevent a worker speaking about harassment or discrimination will be void altogether. The guide to non-disclosure agreements explains the wider rules.

Tax: the first £30,000 and the rest

The headline rule is that the first £30,000 of a genuine termination payment is free of income tax and employee National Insurance. That allowance covers compensation for loss of employment, statutory and enhanced redundancy pay and the value of non-cash benefits, all added together. Anything above £30,000 is taxed as income through PAYE, and since 6 April 2020 the employer pays Class 1A National Insurance on the excess; the employee does not.

Several payments never qualify. Salary, holiday pay, bonuses and commission are earnings and are taxed in full. Post-employment notice pay is taxed in full. Payments for agreeing to restrictive covenants are taxed in full. Payments for injury or disability that ends the employment are exempt entirely, and the employer's contribution to your legal fees is not taxable provided it is paid directly to your adviser under a term of the agreement. The way the agreement describes each sum does not change its tax treatment, so a solicitor will check that the figures are correctly split and that the tax indemnity does not expose you to a bill for the employer's errors.

Negotiating the terms and the solicitor's role

The employer's contribution to legal fees is a convention rather than a legal requirement. Across England and Wales it commonly sits in the hundreds of pounds plus VAT, often somewhere between about £350 and £750, with higher figures for senior staff and complex agreements; that is a practice observation rather than an official figure. The contribution is intended to cover the statutory minimum: advice on the terms and their effect on your right to claim. Negotiating improvements usually costs more, and the solicitor will tell you whether the extra fee is likely to pay for itself.

Negotiation is normal and expected. The questions a solicitor asks are what claims you would have if you refused, what they would be worth after reductions and the risk of losing, how long you are likely to be out of work and what the employer gains from a quick, quiet exit. A credible unfair dismissal or discrimination claim can justify a substantially higher payment. Beyond money, common requests are a better reference, a longer period on garden leave, keeping a company car or phone, outplacement support, a contribution to a pension rather than cash, narrower restrictive covenants and confidentiality that binds the employer too. A good adviser also checks that the payment date, the reference wording and the clawback clauses are workable.

Timescales are short. Most agreements are offered with a deadline of ten days or so, the advice meeting takes an hour or two, and the employer's solicitor will usually turn round amendments within days. Resist pressure to sign on the spot, but do not assume an offer will stay open indefinitely; employers can and do withdraw. For a sense of what employment work costs more generally, see how much an employment contract costs.

Should you sign? Settlement compared with a tribunal claim

Signing means giving up the right to bring the listed claims for good, so the decision rests on what those claims are worth against what is on the table. Points in favour of settling are certainty, speed and tax efficiency: the money arrives within weeks, the first £30,000 is tax free, you avoid the stress and publicity of a hearing, and you can negotiate terms such as a reference that no tribunal can order. Points against are that a fair-value settlement requires you to understand your claims, that confidentiality may matter to you less than being heard, and that an employer offering very little may simply be testing whether you know your rights.

The alternative is a tribunal claim. There are no fees, but the process takes time: a first hearing is often more than a year away, final hearings are being listed well into 2028 in many regions and you will usually pay your own legal costs whatever the outcome. Compensation for ordinary unfair dismissal is capped at £123,543 or 52 weeks' pay for dismissals taking effect by 31 December 2026, and awards are typically far lower; discrimination compensation is uncapped. The guide to the employment tribunal process describes the stages and the discrimination at work guide covers those claims. Settlement talks can continue after a claim is issued, through Acas or directly, and most claims settle before a hearing.

If you have been offered a settlement agreement, do not sign anything, do not resign and do not agree terms by email before you have spoken to an adviser. Gather your contract, payslips, the offer letter and any grievance or disciplinary papers, note the deadline, and book an appointment with an employment law solicitor who handles settlement agreements regularly; many offer a same-week appointment and work within the employer's contribution for straightforward cases. You can compare employment law solicitors in London or employment law solicitors in Liverpool on this site, or search by your own town.

Frequently asked questions

Do I have to accept a settlement agreement?

No. A settlement agreement is voluntary, and refusing one is not a reason for dismissal. If you refuse, the employer may continue with whatever process it was running, such as redundancy consultation or a disciplinary, and must do so fairly. What was said in a protected conversation cannot be used in an ordinary unfair dismissal claim, but if the employer behaved improperly, for example by threatening you, the protection falls away and you can rely on it.

Who pays for the solicitor?

The employer almost always contributes a fixed sum, paid directly to your adviser against an invoice once the agreement is signed, and that contribution is not taxable. It usually covers advice on the terms and effect of the agreement but not detailed negotiation. If you want your solicitor to negotiate, agree the extra cost first; many firms ask the employer to increase the contribution as part of the negotiation, and some will act within the contribution if the agreement is straightforward.

How long do I have to decide?

The Acas Code of Practice on Settlement Agreements recommends at least ten calendar days to consider a written offer and take advice, and most employers follow it, although it is guidance rather than law. Very short deadlines or threats about what will happen if you refuse can amount to improper behaviour, which removes the employer's protection under section 111A. Ask for more time in writing if you need it, and remember that an employer can withdraw an offer before it is accepted.

Is the settlement payment tax free?

Only part of it, in most cases. Compensation for loss of employment and redundancy payments are tax free up to a combined £30,000, with the excess taxed as income. Salary, holiday pay, bonuses, pay for notice you do not work and payments for restrictive covenants are taxed in full however they are labelled. The agreement will contain a tax indemnity, so check that the split between taxable and non-taxable sums is right before you sign.

Can I still claim if I discover something after signing?

Generally not for the claims listed in the agreement, which is why the list is checked so carefully. Claims that are usually excluded from the waiver, such as accrued pension rights, personal injury you did not know about and claims to enforce the agreement itself, survive. If the employer fails to pay or breaches a term such as the agreed reference, you can sue for breach of contract in the county court, and the agreement itself sets out what each side promised.

What is the difference between a settlement agreement and a COT3?

Both are binding settlements of employment claims. A settlement agreement is a private contract that must meet the conditions in section 203, including independent legal advice. A COT3 is the form Acas uses to record a settlement reached through its conciliators, either during early conciliation or after a claim is issued; no legal advice is required because the conciliator is involved, although you can still take it. COT3 wording is usually shorter and the employer does not have to contribute to fees.

Related guides

• Unfair Dismissal: Your Rights, Time Limits and Compensation
• Redundancy: Your Rights, Consultation and Statutory Redundancy Pay
• Constructive Dismissal: When Can You Resign and Claim?
• Non-Disclosure Agreements (NDAs): How They Work and When to Use One
• How much does an employment contract cost?

This guide describes the law in England and Wales as at 30 October 2026. It is general information, not legal advice about your situation; the law and the figures it quotes change, so check the position with a solicitor before acting. LawFirms.co.uk is a directory and does not provide legal services.