What Is a Settlement Agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer that ends your employment on agreed terms. In exchange for a financial payment, you agree to waive your rights to bring employment tribunal claims.
A settlement agreement is only legally valid if you have received independent legal advice from a qualified solicitor or adviser before signing. This is a statutory requirement under the Employment Rights Act 1996.
Why Your Employer Pays Your Legal Fees
Most employers will offer to pay a contribution to your legal fees — typically £250–£500 plus VAT — as part of the settlement package. This is because the agreement is worthless unless you take legal advice, so it is in their interest to facilitate this. Some employers pay higher contributions, particularly for senior employees.
What a Settlement Agreement Typically Includes
A standard settlement agreement will cover: the amount being paid and how it is structured (salary, payment in lieu of notice, compensation); a waiver of your right to bring tribunal claims; confidentiality obligations; a reference or agreed wording for future employers; and often restrictions on working for competitors.
Negotiating a Better Settlement
The figure your employer first offers is rarely their best offer. An experienced employment solicitor can advise whether the amount is fair given your circumstances, the strength of any tribunal claim you might have, and your length of service. We regularly see clients achieve significantly improved settlement terms after taking advice.
The first £30,000 of a genuine compensatory payment is usually free of income tax. Payments for notice, holiday pay, and benefits in kind are fully taxable. Your solicitor should explain the tax treatment of each element.
Red Flags in Settlement Agreements
Watch out for extremely broad confidentiality clauses that may prevent you discussing the situation with your family, excessive non-compete restrictions that could prevent you working in your industry, and settlement figures that are significantly below what a tribunal might award.
How to Find a Settlement Agreement Solicitor
Use our directory to find specialist employment solicitors in your area. Most will advise on settlement agreements at a fixed fee, often covered fully or partly by your employer's contribution. Bring your settlement agreement, employment contract, and any correspondence to the meeting.