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Settlement Agreements (for employees)

What is a settlement agreement?

A settlement agreement is a legal contract between an employer and an employee. In a settlement agreement, the employee will usually receive a compensation payment in exchange for giving up their right to bring Employment Tribunal claims against their employer.

Why have I been offered a settlement agreement?

Employers will usually offer a settlement agreement in order to bring an employee’s employment to an end on agreed terms. Settlement agreements are commonly offered by employers who want to avoid going through a long internal process with an employee before being able to terminate their employment. An employer may also choose to offer an employee a settlement agreement to avoid having to deal with a workplace grievance or dispute between the employer and employee.

What are the advantages of a settlement agreement?

A settlement agreement can be advantageous to employees, because it can guarantee financial compensation, sometimes paid in a tax-efficient way, without the stress of having to bring a claim in the Employment Tribunal. A settlement agreement can also offer an employee a degree of closure as it means they can leave their employment (often without having to work their notice period) by mutual agreement and enter into a full and final settlement of any employment disputes they may have had. They will also often have their legal costs covered by their employer, because it is a condition of settlement agreements that the employee has received independent legal advice on the terms of the agreement and their potential employment claims.

For the employer, a settlement agreement can guarantee that the employee can’t bring Employment Tribunal claims against them in future.

What is the difference between settlement agreements and compromise agreements or COT3s?

Settlement agreements were previously known as compromise agreements and this term is still used by some employers. A COT3 agreement is a type of settlement agreement used for settling workplace disputes with the help of an ACAS conciliator, usually when an employee starts ACAS early conciliation proceedings against their employer with a view to starting an Employment Tribunal claim.

What is the process for agreeing a settlement agreement?

Employers will often offer settlement agreements during “protected conversations” with their employees. Protected conversations are off-the-record discussions, sometimes also called “without prejudice” discussions. The effect of the “without prejudice” or protected conversation rules are that any offers made or information disclosed by an employer during settlement negotiations can’t usually be used as evidence in an Employment Tribunal hearing.

What claims am I giving up under a settlement agreement?

By signing a settlement agreement, you’ll be giving up your right to bring current or future claims against your employer to the Employment Tribunal. For example, you’ll be giving up your right to bring an Employment Tribunal claim against your employer for unfair dismissal, or discrimination claims.

However, there are certain claims that you’ll still be able to bring against your employer even after you’ve signed a settlement agreement. They include:

  • Where you want to sue your employer for breaching the settlement agreement (e.g. if your employer hasn’t paid you the right compensation under the agreement);
  • A claim to do with your accrued pension rights; or
  • A claim for personal injury where you weren’t aware of that personal injury when you signed the settlement agreement.

What payments might I expect to receive under a settlement agreement?

Payments under a settlement agreement can include:

  • Your salary up to your last day of employment (subject to tax and national insurance contributions).
  • Notice pay, provided you’re not working your notice period (subject to tax and national insurance contributions).
  • A lump sum payment as compensation for loss of employment and in exchange for giving up your right to bring a claim for unfair dismissal, discrimination claims and claims under your employment contract. Usually, up to £30,000 of this can be paid tax free.
  • A payment in lieu of any holidays that you’ve accrued but not taken (up to the last day of your employment). This payment is subject to tax and national insurance contributions.

Do I have to sign a settlement agreement?

No, if you’re not happy with the terms of the settlement agreement, you’re not under any obligation to sign it.

Can I negotiate the terms of the settlement agreement?

Yes, you can. You may want to negotiate over any termination payment offered to you, and also over the non-financial terms, such as an agreed reference, a different termination date, or the wording of an agreed announcement of your exit.

What are the most important terms to think about during pre-termination negotiations?

We can advise you during your settlement discussions on what level of settlement payment you can realistically expect, and what other terms would amount to a fair settlement. Other than any settlement payment, the issues that are often most important to concentrate on in pre-termination negotiations are:

  • Your preferred termination date and whether you need to work your notice period.
  • Whether any restrictive covenants under your contract can be waived so you can work for a competitor of your employer if you need to.
  • Whether the proposed settlement agreement contains an agreed reference to be given to future employers.
  • Whether you have any accrued holiday pay or are owed any other contractual payments as well as your termination payment.
  • Whether you would like to be allowed to keep any company car or other company property.

Do I need to obtain legal advice on a settlement agreement?

Yes. A settlement agreement will only become legally binding once you’ve received independent legal advice from a solicitor or other “relevant independent adviser”, such as a qualified trade union official. This is to protect you and to ensure that you fully understand the terms of the settlement agreement and its effects, especially because you are giving up most of your statutory employment rights by signing a settlement agreement. We regularly advise individuals on their settlement agreements.

How much will it cost to obtain legal advice on a settlement agreement?

Usually, your employer will pay your legal fees (or at least a contribution towards them) in getting independent legal advice on the agreement from a solicitor. Depending on how complicated the settlement agreement is, your employer’s contribution to your legal fees could vary from £350+VAT up to £1,000+VAT.

Many settlement agreements are relatively straightforward and if so, it should be possible for the employer’s contribution to cover your total legal fees in getting advice on the agreement. In more complicated cases, your fees could exceed your employer’s legal fees contribution. For more information on legal costs for obtaining advice on your settlement agreement, please contact a member of our employment law team.

Once I sign the settlement agreement, can I tell anyone about it?

It’s standard for settlement agreements to include a confidentiality clause, which prevent you from discussing the terms, or even the existence of, the settlement agreement. However, settlement agreements should include some exceptions to this rule. For example, both parties are allowed to discuss the settlement agreement with their professional advisers (e.g. their solicitors or accountants), and you are usually allowed to discuss the agreement with your immediate family. You will also be able to make a “protected disclosure”, for example to a regulator, if you want to blow the whistle on something unlawful that you have discovered during your employment.

What if I still want to bring an employment claim in the future?

Settlement agreements can settle future employment claims, even those the employee doesn’t know about, as well as past claims or any existing Employment Tribunal proceedings. This is why taking legal advice when you are offered a settlement agreement is so important: if you discover something in future which makes you want to bring an Employment Tribunal claim, signing a settlement agreement usually means you can’t do so.

If you have been offered a settlement agreement from your employer, please contact a member of our employment law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.


To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.

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