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Settlement Agreement UK: Employer Guide (2025)

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Part ofUK Employment Law Guide for Employers (2025)

Written by Brad Askew Solicitor (non-practising)
Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice.
Updated June 2026 · England & Wales
A settlement agreement is one of the most useful tools an employer has when a working relationship needs to end on terms both sides can live with. It turns what could become a messy, expensive tribunal fight into a controlled conversation with a clear financial outcome and a clean legal break. For the employer, it buys certainty. For the employee, it usually means a payment and a sensible reference, in exchange for signing away the right to bring most claims. Historically these were called compromise agreements, and you will still hear older managers use that term. The mechanics are broadly the same. This guide walks through when they make sense, what goes inside one, the process for offering one without tripping over the 'without prejudice' rules, and the points that most often cause trouble in practice.

What this document is

A settlement agreement is a legally binding contract between an employer and an employee that ends the employment relationship (or resolves a specific dispute during employment) on agreed terms. In return for a negotiated payment and any other agreed benefits, the employee gives up the right to bring most employment claims against the employer, including unfair dismissal, discrimination, breach of contract, and unpaid wages.

A handful of claims cannot be signed away, for example accrued pension rights and personal injury claims the employee does not yet know about. For the agreement to be enforceable under the Employment Rights Act 1996, it must meet strict statutory conditions: it has to be in writing, relate to a particular complaint or proceedings, and the employee must have received independent advice from a qualified adviser who is identified in the document and who carries professional indemnity insurance. Without those ingredients, the waiver of claims simply does not bite, and the employer has paid out for nothing.

How to use this document

  1. Decide whether a settlement agreement is genuinely the right route. Before drafting anything, work out what problem you are solving. Redundancy with an enhanced package, performance issues you would rather not take through a full process, a senior exit that needs confidentiality, or a grievance you want to draw a line under – each has different implications for the offer and the conversation that introduces it.
  2. Hold a protected conversation with the employee. Under section 111A of the Employment Rights Act 1996, pre-termination negotiations can be kept out of any later unfair dismissal claim, provided there is no improper behaviour. Invite the employee to a meeting, explain that you want to discuss a possible agreed exit on a without prejudice basis, and give them time to consider. The Acas Code of Practice on settlement agreements sets the expected standards here.
  3. Put together a fair and commercially sensible offer. Think about statutory and contractual notice, any enhanced redundancy or ex gratia payment, accrued holiday, bonus or commission treatment, pension contributions, benefits continuation, and the wording of any reference. The first £30,000 of a genuine termination payment can often be paid free of tax, but the treatment of notice pay and other elements is more complex and needs checking.
  4. Draft the agreement and send it with a clear cover letter. The document should identify the claims being settled, the payments and their tax treatment, confidentiality, non-derogatory comments, return of property, post-termination restrictions where relevant, and the independent adviser certificate. The Acas Code suggests giving the employee a reasonable period, commonly ten calendar days, to consider the proposed terms.
  5. Let the employee take independent advice and finalise the paperwork. The employee must see a relevant independent adviser (typically a solicitor, certified trade union official, or advice centre worker) who signs the certificate confirming advice has been given. Employers usually contribute towards the cost of that advice. Once both sides sign, the agreement is binding and the agreed payments should follow on the dates set out in the document.

Common questions

If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £149.

Common questions

Q Can an employee refuse to sign a settlement agreement?
Yes. A settlement agreement is a negotiation, not a unilateral decision. The employee is free to reject the offer, ask for better terms, or walk away entirely. If they refuse, the employer is back to whatever underlying process would otherwise apply, such as a redundancy consultation, disciplinary procedure, or performance process. Applying pressure to sign can itself amount to improper behaviour and may mean the conversation is no longer protected.
Q Do I have to offer a minimum payment?
There is no statutory minimum specific to settlement agreements. The employee is entitled to whatever they would have received anyway, such as accrued pay, holiday, notice, and any statutory redundancy pay if the situation is a redundancy. The 'settlement' element is usually an additional ex gratia sum on top, reflecting the strength of any potential claims and the commercial value of a clean break.
Q Is the payment really tax-free up to u00a330,000?
Only genuine termination payments, compensation for loss of employment rather than payment for work done or contractual entitlements, can fall within the u00a330,000 tax-free band. Notice pay is now generally taxable as earnings under the post-employment notice pay rules, as are contractual bonuses and accrued holiday. HMRC guidance on termination payments should be checked, and the agreement should set out the tax treatment of each element clearly.
Q Why does the employee need their own adviser?
Statute requires it. For the waiver of employment claims to be legally effective, the employee must have received advice from a relevant independent adviser on the terms and effect of the agreement, particularly its impact on their ability to bring a tribunal claim. The adviser is named in the agreement and must have professional indemnity cover. Without that, the waiver fails.
Q Can a settlement agreement cover future claims?
It can cover specific future claims if they are identified clearly and the employee has taken advice on them. However, a blanket waiver of unknown future claims is risky and often challenged. Most agreements list specific claims being settled, by reference to the relevant statutes, and carve out things that cannot be waived, such as accrued pension rights and latent personal injury claims.
Q What happens if the employee breaches the agreement afterwards?
A well drafted settlement agreement will include clawback provisions, meaning part or all of the settlement sum becomes repayable if the employee breaches key terms such as confidentiality, non-derogatory comments, or post-termination restrictions. The employer can also sue for breach of contract. In practice, clear drafting and a realistic set of obligations make disputes much less likely.
Q Are settlement agreements always confidential?
Confidentiality is standard but not automatic. Most agreements contain a mutual confidentiality clause covering the terms and the existence of the agreement, with carve-outs for close family, professional advisers, tax authorities, and protected disclosures (whistleblowing). Employers should be careful not to draft confidentiality so widely that it looks like an attempt to gag the employee from reporting wrongdoing, which is unenforceable and reputationally damaging.
If you're dealing with this kind of situation, speak to an experienced legal adviser who can walk you through it — from £149.

Sources

This guide is based on primary UK law and official guidance.

Brad Askew, Solicitor (non-practising)

Written & reviewed by

Brad Askew Solicitor (non-practising)

Brad is on the roll of solicitors of England & Wales but does not hold a practising certificate and does not provide legal advice. LegalDocuments.co.uk is not a law firm and does not provide regulated legal advice.

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Legal disclaimer
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.