Settlement agreement

A binding contract to end a workplace dispute — and to give up your right to take it further. Understanding what you are signing, and what the conditions for a valid agreement are, matters before you put pen to paper.

Do I have to sign a settlement agreement?

No. A settlement agreement is voluntary — your employer cannot force you to sign one, and signing under duress may make it unenforceable. You are entitled to take time to consider the offer and take independent legal advice before deciding. The standard ACAS-recommended period is ten calendar days, though employers can offer more time and some offers come with a longer window.

What claims am I giving up when I sign?

Only the claims expressly listed in the agreement. A well-drafted settlement agreement specifies every claim being waived — unfair dismissal, wrongful dismissal, discrimination, unpaid wages, and so on. If a claim is not named, it is not settled, so it is important to read the list carefully. Your independent legal adviser should go through every claim with you and flag any that should be added or removed before you sign.

Does my employer have to pay for my legal advice?

Employers are not legally required to pay, but in practice the vast majority do — often as a condition the employee insists upon. A contribution of £250 to £500 plus VAT is common for straightforward cases, though advice on complex agreements can cost more. Whatever the employer offers, the decision to sign remains yours, and your adviser works for you, not your employer.

Is the settlement payment tax-free?

Payments that are genuinely compensation for loss of employment — as opposed to pay in lieu of notice, holiday pay, or bonuses already owed — can attract the £30,000 exemption under the Income Tax (Earnings and Pensions) Act 2003. Payments above £30,000 are taxable as income. Payments in lieu of notice have been subject to income tax and National Insurance since April 2018 regardless of how they are labelled. Your adviser or an accountant can help you understand the tax position on your specific offer.

What is the difference between a settlement agreement and a COT3?

Both are legally binding, but they are different instruments. A settlement agreement is a private contract between you and your employer, drafted by solicitors and requiring you to take independent legal advice. A COT3 is an agreement brokered through ACAS and recorded on ACAS form COT3 — no independent legal advice requirement, lower costs, and often faster. COT3s typically arise when ACAS early conciliation is already under way. Settlement agreements are more flexible and can cover claims beyond those already notified to ACAS.

Can I negotiate the terms?

Yes. The first offer is rarely final. You and your adviser can push back on the amount, the reference wording, confidentiality obligations, post-termination restrictions, and the scope of claims covered. Common negotiation points include asking the employer to remove non-disparagement clauses that apply only to you, removing or narrowing restrictive covenants, and improving the agreed reference. The fact that your employer has started a settlement conversation does not mean you must accept their initial terms.

What happens if the settlement agreement is invalid?

If the agreement fails to meet one of the statutory conditions — for example, if the adviser was not properly qualified or was not covered by professional indemnity insurance — the waiver of tribunal claims is void. You could then still bring those claims, even if you kept any payment made under the agreement. This is why employers insist on a warranty from your adviser confirming that all conditions have been met.

Settlement agreement

Start My Claim — UK Legal Case Builder

Build and run your own employment tribunal, small claims, scam refund or renters' rights case with Start My Claim.

Settlement agreement

Last reviewed: June 2026

Employment Tribunal track

settlement agreement

is a written, legally binding contract in which an employee gives up specified employment claims in exchange for a payment or other terms — but it is only valid if the employee has received

independent legal advice

from a qualified adviser before signing.

Where this comes from

Employment Rights Act 1996, s.203

— the provision that makes most agreements to exclude employment rights void, but creates the exception for settlement agreements that meet specific conditions.

Enterprise and Regulatory Reform Act 2013

— renamed "compromise agreements" to "settlement agreements" and introduced protected pre-termination conversations under ERA 1996 s.111A.

Income Tax (Earnings and Pensions) Act 2003, s.401–404

— governs the £30,000 exemption for qualifying termination payments.

ACAS — Settlement agreements

— ACAS guidance including the Code of Practice on settlement agreements.

ACAS Code of Practice on Settlement Agreements (2013)

— not legally binding, but taken into account by tribunals; recommends at least ten calendar days to consider.

What a settlement agreement actually is

Most contracts that purport to sign away your employment rights are void. Parliament decided long ago that you cannot simply contract out of statutory protections — the point of those protections is that employees often have unequal bargaining power. But the law has always recognised one legitimate way to settle a real dispute: section 203 of the Employment Rights Act 1996 creates a specific exception, setting out the conditions a written agreement must meet for the waiver to hold.

Until 2013 these agreements were called

compromise agreements

. The name changed to

settlement agreements

under the Enterprise and Regulatory Reform Act 2013, which also introduced the related concept of a protected pre-termination conversation. The substance is the same as before; the rebranding was deliberate — the Government wanted to reduce the stigma of the word "compromise" and encourage earlier settlement.

The core mechanism is straightforward. Your employer offers you money, or some other benefit, in exchange for you agreeing not to bring particular claims. You are released from employment. Your employer is released from legal exposure. Unlike a tribunal judgment, the agreement is private — neither the existence nor the amount has to be disclosed. A typical agreement also contains a confidentiality clause, a non-disparagement clause, and an agreed form of reference, all of which are negotiable.

The critical point is the

independent legal advice requirement

. For the waiver to be effective the agreement must be in writing, must relate to a particular complaint or proceedings, must identify the adviser, and you must have received independent legal advice about its effect on your ability to bring tribunal proceedings. The adviser must be a relevant independent adviser — a solicitor, a barrister, a trade union official with appropriate authorisation, or a workers adviser at a CAB or advice centre — and must be covered by professional indemnity insurance or an equivalent indemnity arrangement. If any of these conditions is not met, the waiver is void even if you have signed and received payment.

The employer typically contributes to the cost of your legal advice. There is no legal requirement to do so, but in practice employees routinely ask for a contribution as part of the negotiation and employers almost always agree, because a valid agreement requires the advice to happen. Contributions of £250 to £500 plus VAT are common for a standard case; more complex agreements attract higher fees, and employers will usually meet a reasonable increase.

A related but distinct concept is the

protected conversation

, introduced by ERA 1996 s.111A at the same time. This allows an employer to approach an employee and make an offer to terminate on agreed terms, and that conversation cannot be used in unfair dismissal proceedings even if no agreement is eventually reached — provided the conversation was not conducted improperly. The protection only covers unfair dismissal; it does not shield offers made in the context of ongoing discrimination, whistle-blowing or automatically unfair dismissal. "Without prejudice" conversations can overlap, but they cover pre-existing disputes rather than a clean opening offer.

How it works in practice

Maria has worked as a senior analyst for a financial services firm for

. Following a restructure, her manager calls her in, explains that her role is "at risk", and hands her a settlement agreement offering three months gross salary (£9,500) plus a contribution of £500 plus VAT towards her legal advice. She has

Offer: 3 months gross pay

Legal advice contribution

Statutory minimum redundancy (4 yrs service, age 30s)

Amount above statutory minimum

Maria consults her solicitor, who points out two things. First, the agreement covers "all claims arising from employment or its termination" — a broad waiver that would include an age discrimination claim she had not mentioned to the firm. She had recently been passed over for promotion in favour of a significantly younger colleague and has some evidence suggesting this was age-related. Second, the proposed reference is entirely generic, with no mention of her specific accomplishments.

Her solicitor writes back requesting three changes: the payment to be increased to £14,250 (reflecting the discrimination element), the reference to include two specific sentences about her work, and the removal of a post-termination non-solicitation clause that runs for twelve months. The firm agrees to £12,500, the improved reference, and a six-month restriction instead of twelve.

the initial offer is rarely the final one. The independent legal advice requirement is not a formality — it is the mechanism that identifies leverage and improves the deal.

Common pitfalls for employees

• Signing before taking independent advice.
• An agreement signed without meeting the statutory advice conditions is unenforceable as a waiver of tribunal claims — but you may have already left the workplace and received a payment you cannot keep without the agreement being valid. Take advice first, every time.
• Accepting an artificially short deadline.
• Ten calendar days is the ACAS-recommended minimum. Employers sometimes present offers with a shorter window to create urgency. You are entitled to ask for the full ten days (or more), and if time pressure is being used improperly, that may itself amount to improper conduct under the protected conversation rules.
• Overlooking claims you did not know you had.
• The waiver covers every claim named in the agreement — which may include discrimination, whistle- blowing, and wage claims you had not yet identified. Your adviser should go through every listed head of claim with you before you sign.
• Assuming the £30,000 exemption applies to everything.
• Pay in lieu of notice, accrued holiday pay, and bonuses already earned are taxable in full regardless of how they appear in the agreement. Only the genuine compensation for loss of employment attracts the exemption. Mis-apportioning the payment to inflate the tax-free element can trigger HMRC scrutiny.
• Neglecting the reference and post-termination restrictions.
• These have long-term practical consequences. A vague or lukewarm reference can harm job prospects. An overbroad non-solicitation or non-compete clause can restrict income for a year or more. Both are almost always negotiable.
• Treating the process as adversarial from the start.
• A settlement agreement is, at its heart, a commercial negotiation. Employers opening settlement discussions generally want a clean exit as much as you do. Calibrated negotiation — led by your adviser — tends to produce better outcomes than either immediate acceptance or confrontational refusal.

Frequently asked questions

Sources & further reading

• Employment Rights Act 1996, section 203
• — statutory conditions for a valid settlement agreement (legislation.gov.uk)
• Enterprise and Regulatory Reform Act 2013
• — introduced the name change and protected conversations (legislation.gov.uk)
• Settlement agreements
• — ACAS guidance including the Code of Practice
• ACAS Code of Practice on Settlement Agreements (2013)
• Income Tax (Earnings and Pensions) Act 2003, ss.401–404
• — the £30,000 termination payment exemption (legislation.gov.uk)
• Check if a settlement agreement meets the conditions

Working out what a settlement offer is worth?

Start My Claim helps you build a schedule of loss and understand the full value of your potential tribunal claim — so you can compare any offer against what you might recover if you went ahead.

Last reviewed: June 2026.

Statutory references checked against the Employment Rights Act 1996, the Enterprise and Regulatory Reform Act 2013 and the Income Tax (Earnings and Pensions) Act 2003 as in force on 5 June 2026.

This page is explanatory only and is not legal advice. Start My Claim is self-service software, not a law firm — its tools help you build and run your own case.