A settlement agreement ends your employment in exchange for a financial payment and waives your right to bring tribunal claims. This guide explains how they work, what to watch for, and how to negotiate.
If you are leaving your job following a dispute, redundancy, or performance process, your employer may offer you a settlement agreement. Signing one means giving up your right to bring legal claims — in exchange for money. It is crucial to understand what you are agreeing to before you sign.
A settlement agreement (formerly called a "compromise agreement") is a legally binding contract between you and your employer. In it, you agree to:
In return, your employer pays you:
A settlement agreement is only legally binding if all of these conditions are met:
Your employer must pay at least a contribution to your legal fees for taking independent advice — this is standard practice.
The main payment in a settlement agreement. Up to £30,000 is generally tax-free — the balance is subject to income tax and NI.
Note: Since April 2018, the tax-free treatment does not apply to PILON (notice pay in lieu) — this is taxable regardless of whether it is included in the settlement.
Pay in lieu of your notice period. This is taxable income and subject to NI.
You are entitled to pay for any unused annual leave — this is not a matter of negotiation but a legal entitlement.
Usually £250–500 + VAT to cover your solicitor's time reviewing and advising on the agreement.
A negotiated reference — usually in the form of an agreed factual statement (dates of employment, job title) rather than a character reference.
Settlement agreements can waive claims relating to:
Some claims cannot be waived in a settlement agreement, including:
There is no obligation to sign. Before deciding:
Settlement agreements are negotiable. Common points of negotiation:
If your employer has not offered a settlement agreement but you have a potential claim, ACAS Early Conciliation is a free process that can lead to a negotiated settlement (a COT3 agreement) — which is simpler and cheaper for both sides than a tribunal.
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