What Is an Employment Settlement Agreement?

An employment settlement agreement is a legally binding contract between an employer and an employee that settles an employment dispute or ends the employment on agreed terms, usually in return for a payment. In exchange, the employee agrees not to bring certain claims, such as unfair dismissal or discrimination. To be legally valid, the employee must receive independent legal advice before signing.

What is a settlement agreement?

It is a way of resolving matters cleanly and with certainty for both sides. Employers often use one to end employment without the risk of a tribunal claim, and employees receive a payment and clarity about their position. It can be used on redundancy, on a negotiated exit, or to settle a live dispute. Once signed correctly, it prevents the listed claims from being pursued.

Why must you take legal advice?

By law, a settlement agreement is only binding if the employee has taken advice from an independent adviser, usually a solicitor, on the terms and effect of the agreement. The adviser must be identified in the agreement and be insured. Employers usually contribute towards the cost of this advice. Without it, the agreement does not validly waive the employee’s statutory claims.

What does a settlement agreement usually include?

Typical terms cover:

• The termination payment and how it will be taxed
• Any payment in lieu of notice, holiday pay and outstanding salary
• The claims being waived
• Confidentiality and, sometimes, an agreed reference
• Restrictions such as not making derogatory comments

How is the payment taxed?

The first £30,000 of a genuine termination payment that is compensation for loss of employment can usually be paid tax-free, but contractual payments such as notice pay, bonuses and accrued holiday are taxable in the normal way. The tax treatment depends on the make-up of the payment, so it is worth checking the figures carefully before signing.

Should you accept what is offered?

Not necessarily at the first figure. The sum offered is often open to negotiation, particularly where there is a potential claim. Taking advice early lets you understand the value of any claim and whether the offer is fair before you commit. Our settlement agreements page explains how we advise and, where needed, negotiate on your behalf.

Getting advice

If you have been offered a settlement agreement, we can advise you on the terms and sign it off, usually at little or no cost to you. See our workplace issues service or request a callback.