A settlement agreement ends your employment in exchange for a payment — but signing the wrong one can cost you thousands. Here's what UK law requires, what you should negotiate, and what you must never waive.
A settlement agreement is one of the most significant documents you'll ever sign. It ends your employment, waives most of your legal rights against your employer, and — if done correctly — provides you with a tax-efficient payment. If done incorrectly, it can leave you significantly worse off than if you'd gone to tribunal.
Here's what you need to know before you sign anything.
A settlement agreement (previously called a compromise agreement) is a legally binding contract between an employer and an employee. In exchange for a financial payment, you agree to give up your right to bring employment tribunal claims arising from your employment or its termination.
They are used in a wide range of situations:
The key point: a settlement agreement is entirely voluntary. Your employer cannot force you to sign one, and you are under no legal obligation to agree to the terms offered.
For a settlement agreement to be legally valid under the Employment Rights Act 1996, it must satisfy several conditions:
If any of these conditions are not met, the agreement will not be legally effective and you could still bring tribunal claims despite signing it.
This is the most important safeguard. Your employer is legally required to contribute to the cost of your independent legal advice — typically between £250 and £500 plus VAT. If your employer refuses to contribute, that is unusual and worth querying.
The advice you receive must cover the specific claims you are waiving. A solicitor who simply reads the document and rubber-stamps it without explaining your potential claims is not providing adequate advice. You should leave any advice session knowing:
Certain rights cannot be waived in a settlement agreement, regardless of what the document says:
The tax treatment of settlement payments depends on what the payment is for:
Your solicitor should advise you on the structuring of any payment to ensure you're not paying more tax than necessary.
A settlement agreement is the beginning of a negotiation, not a final offer. Key areas to consider pushing on:
The headline figure. Calculate the tribunal value of your claims before accepting. An unfair dismissal claim at tribunal could be worth up to £115,115 (the basic and compensatory award cap as of April 2025). Discrimination claims are uncapped.
The notice period. You should receive either payment in lieu of notice (PILON) or be required to work your notice — whichever your contract specifies. If the employer is cutting short your notice without a PILON clause, that is a breach of contract worth including in negotiations.
Reference terms. Get the agreed wording for your reference included in the agreement, not just a promise. Employers routinely forget verbal commitments.
Confidentiality provisions. Understand what you are agreeing to keep confidential. Standard confidentiality clauses cover the existence and terms of the agreement — but some employers attempt to include broader provisions that could prevent you discussing the reasons for your departure with anyone.
Return of equipment and company property. Make sure the mechanics of your exit are clear in the document.
Signing too quickly. ACAS recommends a minimum of 10 days to consider the offer. There is no legal minimum period, but if your employer is pressuring you to sign within 24 hours, that is a warning sign.
Accepting a first offer. Settlement agreements are almost always negotiable. The employer's opening offer is rarely their best offer.
Forgetting to claim outstanding sums. Before signing, itemise everything you are owed: outstanding salary, bonus, commission, accrued holiday pay, expenses, share options. Any sums not explicitly addressed may be harder to claim later.
Not reading the restrictive covenants carefully. Settlement agreements often reaffirm post-termination restrictions (non-compete clauses, non-solicitation). If these are onerous, they can be negotiated at this stage.
Once signed, the agreement is binding on both parties. Your employer must make any payments within the timeframe agreed in the document. If they fail to pay, you can enforce the agreement in the civil courts — the employment tribunal has no jurisdiction over settlement agreement disputes.
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