A settlement agreement is a legally binding contract made between an employer and employee. Employers usually offer settlement agreements when they are terminating someone’s employment, or if there is an ongoing dispute that they want to resolve.

Settlement agreements used to be known as compromise agreements.




How does a settlement agreement work?

A settlement agreement sets out the terms and conditions agreed between the parties involved.

For a settlement agreement to be legally binding in England and Wales, the following conditions from Section 203 of the Employment Rights Act 1996 must be met:

  • The agreement must be in writing.
  • The agreement must relate to a specific complaint or proceedings.
  • An independent legal adviser must have informed the employee of the terms and effect of the proposed agreement, and the impact it would have on their ability to pursue that complaint or proceeding before an employment tribunal.
  • The agreement must identify the adviser and their advice must be covered by insurance.
  • The agreement must state that the conditions regulating settlement agreement under the Employment Rights Act have been satisfied.


What should be included in a settlement agreement?

Settlement agreements typically include termination payments - such as your notice pay, a tax-free sum, redundancy, holiday, bonus, shares, and other benefits.

However, as a condition of receiving these payments, you must agree not to pursue certain statutory claims against your employer in a Tribunal or Court, including unfair dismissal, discrimination, or breach of contract.

All of this should be agreed by both parties. During the process of negotiating a settlement agreement, the Acas Code of Practice states that employees should be given a minimum of 10 calendar days, unless agreed otherwise, to consider a settlement offer. Although the code is not binding, employers would have to justify why they don’t need to adhere to it.


Why do employers use settlement agreements?

Employers will offer a settlement agreement when they want to terminate an employment contract on mutually agreed terms. This is done to provide a clean break with no opportunity for you to take them to court or an employment tribunal for more money.

Employers will often use them to avoid a long, drawn-out process, such as a full redundancy procedure or a performance review before being able to terminate.

Another scenario that could prompt a settlement agreement is if you’re having issues around discrimination or have raised a grievance. In these cases, your employer may use it to circumvent a claim for constructive dismissal and/or discrimination.


Do I have to sign a settlement agreement?

No. An employee cannot be forced by their employer to sign a settlement agreement.


Is a settlement agreement legally binding?

Yes. A settlement agreement is a legally binding contract once signed by all parties. It is one of a limited number of ways that such an agreement between an employer and employee can be totally legally binding in law.


Do I need legal advice before I sign?

Yes. An agreement where you waive your rights to bring an employment claim can only be recognised in law if a solicitor or a certified trade union representative has provided independent legal advice upon the terms of the agreement.

Obtaining legal advice will help you decide if a signing is the right choice for you and can help you negotiate the best possible deal.

At Thompsons, our settlement agreement solicitors can provide independent legal advice on the terms you are offered, so you can decide whether to agree to them or to negotiate further.


How much are the legal fees?

Most employers will agree to pay a contribution towards legal advice you receive in relation to a review of your settlement agreement. This can range from £250 to £500 plus VAT.

The contribution can be more than this, but it is very rarely less. It’s important to note that any contributions towards legal fees are not a right or entitlement under statute, but employers almost always offer them.


What is the difference between a settlement agreement and an NDA?

In the UK, an NDA (Non-Disclosure Agreement) is more commonly used in a commercial context than in an employment context. Typically, an NDA is used by businesses seeking to protect confidential commercial information from being inappropriately disclosed.

Settlement agreements are more commonly used in the employment context to settle workplace claims and will also a confidentiality clause.

So, although settlement agreements are not the same as NDAs, their confidentiality clauses have a similar effect.


Can I still get an employment reference if I sign?

While it is common for a settlement agreement to include a provision which states that your employer will provide a reference for you, there is no legal requirement to do so. You must ensure one is included. Our settlement agreement lawyers can negotiate this for you.

You will also want to make sure that the specific wording of any future reference is set out and that your employer agrees not to use any other words.

Your ability to get a job after a settlement agreement may be impacted in certain scenarios. The agreement may contain restrictions which prevent you from working for another company or in a particular field for a certain amount of time.

This could include a direct competitor, finding employment that could damage your former employer if it were disclosed, or a job that might lead to you poaching former clients, colleagues, or suppliers. These types of clauses are known as restrictive covenants.


Need advice on your settlement agreement?

Our employment lawyers are here to help.

At Thompsons, we only represent workers, never their employers – we are 100% on your side.

Trade unions like Unite, UNISON and the RMT trust Thompsons Solicitors to provide employment law advice to their members. We’ve been fighting for workers’ rights for over a century – and we’ll fight for your rights too.

Complete our settlement agreements form or call us on 0800 0 224 224 today.