Being handed a settlement agreement can be unsettling. Sometimes it follows months of difficulty at work. Sometimes it arrives with little warning, after a short meeting and a letter. Either way, it is a significant document and it deserves calm, careful attention rather than a quick signature.

This guide is written mainly for employees, but employers will recognise the same steps from the other side. Employment law is changing, so the detail of any particular situation should always be checked against the current rules.

What a settlement agreement is

A settlement agreement is a legally binding contract between an employer and an employee. In most cases, the employee agrees not to bring certain claims against the employer, such as unfair dismissal or discrimination, and in return the employer agrees to certain terms, often including a payment.

They are most commonly used when employment is ending, but they can also be used to resolve a dispute while employment continues. For employers, they offer certainty. For employees, they can offer a cleaner exit, a financial settlement and some control over how things end.

Many statutory employment rights cannot be signed away in an ordinary contract. A settlement agreement is one of the few ways the law allows this, which is why it comes with specific conditions.

Why independent legal advice is required

For a settlement agreement to validly waive most statutory employment claims, a number of conditions must be met. They include that the agreement is in writing, relates to particular complaints or proceedings, and that the employee has received advice from a relevant independent adviser on its terms and effect, in particular its effect on their ability to bring a claim in an employment tribunal.

A relevant independent adviser is most often a qualified lawyer, such as a solicitor. Certain certified trade union officials and advice centre workers can also act. The adviser must be independent of the employer, must have appropriate insurance in place, and must be identified in the agreement.

The adviser’s role is to explain what you are giving up and what you are getting, and to help you judge whether the terms are reasonable in your circumstances. It is not simply a signature on a certificate. You can read more on our employment advice for individuals page.

Who pays for the advice?

Because the law requires the employee to take advice, it is very common for the employer to contribute towards the employee’s legal fees. The contribution is usually written into the agreement and paid directly to the adviser.

The contribution is often intended to cover advice on the agreement itself. If negotiations become more involved, or you need wider advice about your options, the cost may go beyond the contribution. We will explain at the start what the contribution is likely to cover and what, if anything, you may need to pay yourself, so there are no surprises.

Protected conversations and without prejudice discussions

Settlement is often raised in a conversation that is described as “protected” or “without prejudice”. These are two related but different ideas, and it helps to understand both, with some caution.

Without prejudice

The without prejudice rule is a general legal principle. Genuine attempts to settle an existing dispute usually cannot later be put before a court or tribunal as evidence. The key word is existing. If there is no dispute yet, the rule may not apply, and it will not protect discussions where there has been unambiguous impropriety.

Protected conversations

A protected conversation is a statutory concept in employment law. It allows an employer and employee to discuss ending employment on agreed terms even where there is no existing dispute, and usually prevents that discussion from being relied on in an ordinary unfair dismissal claim.

The protection is narrower than many people assume. It generally does not extend to claims such as discrimination or whistleblowing, and it can be lost if there has been improper behaviour, such as undue pressure. The Acas Code of Practice on settlement agreements also says the employee should be given a reasonable period to consider the proposal.

For employers, the practical message is that these conversations should be planned and handled fairly. For employees, it is worth noting what was said and when, and taking advice before responding.

What to check in the agreement

Every agreement is different, but these are the points we usually look at closely:

  • The payments. How much, when it will be paid, and how it is broken down between notice pay, holiday pay, other contractual sums and any compensation payment.
  • Tax. Contractual payments and notice pay are usually taxed in the normal way. Some compensation for loss of employment can be paid free of tax up to a limit, but the treatment depends on the payment, so the wording matters.
  • The claims being settled. Agreements often list a wide range of claims. Some cannot be waived at all, such as accrued pension rights, and claims you know about should be raised with your adviser.
  • The reference. Many agreements include an agreed reference, which can make a real difference to your next job.
  • Confidentiality and announcements. What you can say about the settlement and how your departure will be explained to colleagues. Confidentiality clauses cannot prevent certain disclosures, such as protected disclosures under whistleblowing law or reporting matters to the police.
  • Restrictions. Whether post-employment restrictions in your contract continue, or new ones are being added.
  • Warranties and repayment. Many agreements require you to confirm certain things, for example that you have not found new work, and may require repayment if those statements are untrue.

Negotiating, and what happens next

A first draft is usually a starting point rather than a final offer. Whether it is sensible to negotiate, and on what, depends on the strength of any potential claims, your priorities and the practical relationship. Sometimes the most valuable changes are not about money at all, but about timing, the reference or how the departure is described.

Once the agreement is signed by both sides and the adviser’s certificate is completed, it is binding. Payments are usually made within an agreed period after signing or after your employment ends.

If you are an employer planning to offer a settlement agreement, our employment law for employers team can help you prepare the conversation and the documents. If a dispute has already escalated, our personal dispute resolution page explains how we can help.