What is a Settlement Agreement in employment?

13th Feb 2026

Author: Mohammed Balal

A Settlement Agreement is a written agreement between you and your employer. It is commonly used to end employment, or to resolve a workplace dispute, on agreed terms. In return for a payment or other benefits, you agree not to bring certain employment claims against your employer, or you agree to withdraw any claims you have already started.

Settlement Agreements at a glance

• it is voluntary: you do not have to sign it
• it is legally binding once signed, provided the legal requirements are met
• you must take independent advice from a qualified adviser for the agreement to be valid
• your employer will usually contribute to your legal fees

What is a Settlement Agreement?

A Settlement Agreement (previously called a compromise agreement) is the document used in England and Wales to settle employment disputes, or to agree an exit, without going to an employment tribunal. When it is valid, it prevents you from bringing the claims listed in the agreement.

For a Settlement Agreement to be valid, it must be in writing, relate to specific complaints or proceedings and you must receive independent advice from a relevant adviser who is insured to provide that advice.

When do Settlement Agreements arise?

You might be offered a Settlement Agreement in situations such as redundancy, a performance or disciplinary process, a grievance, a relationship breakdown at work or concerns about discrimination or harassment.

Sometimes the conversation starts as a “protected conversation” under section 111A of the Employment Rights Act 1996 or as a “without prejudice” discussion. In simple terms, that is your employer exploring an agreed exit while aiming to keep those negotiations out of most unfair dismissal proceedings. This protection is limited and does not cover every type of claim, so it is sensible to take advice promptly.

What might you be offered in a Settlement Agreement?

In exchange for you giving up certain legal claims, an employer will often offer one, or more, of the following:

• a financial payment, often more than your strict contractual entitlement
• an agreed reference, sometimes set out in advance
• confirmation of the agreed termination terms, including your leaving date
• other benefits, such as continued insurance cover for a short period, or the return of company property arrangements being clearly recorded

Every situation is different, so it is important to check what you are being offered, and what you are being asked to give up in return.

How the process usually works

A Settlement Agreement often follows a conversation about ending your employment on agreed terms. This may be raised in a meeting in person, or on Teams.

The process usually looks like this:

1. a meeting takes place where your employer explains the proposal
2. your employer provides a draft Settlement Agreement and sometimes an accompanying letter setting out the key terms
3. you are given time to consider the offer, often around 7 to 10 days, although it can be shorter or longer depending on the circumstances
4. you take independent legal advice on what the agreement means, the claims you would be giving up, and whether the terms are reasonable
5. terms can be negotiated, for example the payment figure, the reference wording, the termination date, confidentiality terms, and any restrictions after employment
6. the agreement is signed once terms are agreed, and your employment ends on the agreed date, with payments made in line with the agreement

If you are given a short deadline, it is still worth taking advice promptly. Even small changes to wording can make a real difference, particularly around references, confidentiality, and restrictions after employment.

Why independent legal advice is required

Independent legal advice is not optional. A Settlement Agreement is only binding if you receive advice on the terms and effect of the agreement, including the claims you are giving up.

This matters because you may be waiving valuable rights and taking on obligations, such as confidentiality and restrictions after your employment ends. Advice helps you understand whether the offer is reasonable, what alternatives you have, and what you might want to negotiate.

Key clauses to check

• termination date and payments: when employment will end, and what you will be paid, and when
• payments breakdown: what is included, such as a termination or compensation payment, notice pay (if notice is not worked), and accrued but untaken holiday pay
• tax and national insurance: which sums are taxed, and which might be paid without tax
• waiver of claims: the specific legal claims you agree not to bring. In most cases, a Settlement Agreement can only settle claims that exist, or could exist, at the time you sign it
• reference and agreed wording: what your employer will say to future employers. This is sometimes attached as a schedule, so you can see the exact wording in advance
• confidentiality: what you can, and cannot, discuss, including whether you can talk about the agreement, and the circumstances behind it. There are usually exceptions, such as disclosures to your Adviser, HM Revenue & Customs, and close family
• non derogatory statements: both sides often agree not to make negative or damaging comments about each other after employment ends. This can cover conversations with colleagues, clients, and on social media
• restrictive covenants: any restrictions after employment, such as limits on competing, approaching clients, or soliciting colleagues. A Settlement Agreement may restate existing restrictions from your contract, reinforce them, or sometimes introduce new restrictions, so it is important to check the detail
• legal fees: the employer’s contribution to your legal costs for obtaining independent advice
• full and final settlement: confirmation that the agreement settles the matters it covers, and that no further claims can be brought in relation to your employment, or its termination, where those claims are included in the waiver

Tax and National Insurance, in plain terms

Some termination payments can be paid without tax up to a limit, but many sums are taxable, including salary, bonus, holiday pay and payments in lieu of notice.

As a general guide, you do not usually pay tax on the first £30,000 of certain termination payments that are treated as a compensation payment. Whether this applies, and how much can be paid this way, can vary from agreement to agreement, and it often depends on how you and your employer have agreed the exit, or the resolution of any dispute. The tax position depends on what the payment represents, and how it is structured.

Can you negotiate a Settlement Agreement?

Often, yes. It may be possible to negotiate the compensation figure, the reference wording, notice arrangements, benefits, confidentiality, restrictions after employment, and the legal fee contribution. What is achievable depends on the facts, the risk on both sides, and how the discussions are handled.

Frequently asked questions

1. Do you have to sign a Settlement Agreement?
   A. No. You can refuse, ask for more time or seek changes.
2. Who pays for the legal advice?
   A. Employers usually contribute to the cost of independent advice, and the agreement normally states the amount.
3. Will it be confidential?
   A. Often, yes. Confidentiality clauses are common, but they usually include exceptions, for example disclosures to your Adviser or to HM Revenue & Customs.

What should you do next?

Do not rush to sign. Keep a copy of everything you are given and take advice early, before you accept terms that might limit your options.

How Butcher & Barlow can help

Once a Settlement Agreement is signed, it is very difficult to undo. Our Employment Law Team will help you understand the terms, the payments, and any restrictions that could affect your next role, in a calm, practical way.

Call Mohammed Balal on 0161 764 4062 or email mbalal@butcher-barlow.co.uk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The information in this article was correct at the time of publication. The information is for general guidance only. Laws and regulations may change, and the applicability of legal principles can vary based on individual circumstances. Therefore, this content should not be construed as legal advice. We recommend that you consult with a qualified legal professional to obtain advice tailored to your specific situation. For personalised guidance, please contact us directly.