Settlement agreements — what you're giving up and how to negotiate
Learn what settlement agreements cover, your rights, and how to negotiate for the best deal possible.
Can my employer force me to sign a settlement agreement?
No. A settlement agreement is voluntary. Your employer cannot force you to sign. However, if they offer you a payment to settle, you're free to negotiate the amount and terms. If you don't agree, you can refuse and proceed with a tribunal claim if you have grounds.
How long do I have to consider a settlement agreement?
There's no legal minimum, but ACAS recommends at least 3 days. Your independent legal adviser should have time to advise you properly. If your employer is pushing you to sign in a few hours, that's a red flag.
Is the first £30,000 of a settlement agreement always tax-free?
Only if the settlement agreement is properly drafted under Section 188 of the Employment Rights Act 1996. The first £30,000 is generally tax-free, but any amount above that is taxable. Your adviser should ensure the agreement states this clearly.
Do I have to have independent legal advice to make the agreement valid?
Yes. For a settlement agreement to be valid and binding, you must receive advice from a qualified independent legal adviser (solicitor, barrister, or trade union rep). Without this advice, the agreement is not valid. Your employer usually pays for this (typically £200-£500).
What if my employer withdraws their settlement offer after I've started thinking about it?
An offer to settle is usually withdrawn at any time unless both parties agree otherwise. However, once you've accepted the offer in writing, it becomes binding. If you've signed, it's a binding contract. Always get legal advice before signing.
What should I negotiate about my reference?
Push for a neutral reference (stating only dates employed and job title) or a positive reference if possible. Avoid vague wording like 'by mutual agreement' as future employers may read this as resignation. Get the exact wording agreed in the settlement agreement.
What is a COT3 and how does it differ from a settlement agreement?
A COT3 is an agreement drawn up by ACAS during early conciliation. It's equally binding but doesn't require independent legal advice and costs nothing. A settlement agreement is between you and your employer, you need independent legal advice, and your employer usually pays a contribution toward your legal fees.
Everything you need to know about settlement agreements (formerly compromise agreements). What they cover, your right to independent advice, and how to negotiate more.
Settlement agreements — what you're giving up and how to negotiate
Compromise agreements
Independent legal advice
What is a settlement agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer that settles all or certain employment claims in exchange for a payment and/or other benefits.
Once you sign a settlement agreement, you waive your right to bring claims related to the issues it covers. This is why it is critical you get independent legal advice before signing.
Key requirements for a valid settlement agreement:
- You must receive independent legal advice from a qualified adviser (solicitor, barrister, or trade union rep)
- The agreement must state that you have received independent legal advice (or waived your right to it, though this is rare and risky)
- You must sign it of your own free will
- Your employer typically pays a contribution toward your legal fees (usually £200-£500)
What is independent legal advice?
A qualified legal professional must review the agreement with you, explain the claims you're giving up, the terms, and advise whether the payment and other benefits are fair in light of your claims. This advice must be independent of your employer (you cannot use the employer's solicitor, for example).
What a settlement agreement covers
Settlement agreements typically settle a broad range of employment claims. Here's what is usually included:
Usually covers unfair dismissal, wrongful dismissal, discrimination, harassment, breach of contract, wage claims, and all other statutory employment law claims.
Confidentiality clause (NDA)
Nearly all settlement agreements include a clause preventing you from discussing the terms of the settlement, the allegations, or the reasons for termination. This is enforceable and breach can result in legal action.
Usually sets out what the employer will say in a reference (e.g., "by mutual agreement" or a positive reference, or neutral facts only). This is crucial — a poor reference can damage your career.
Tax treatment of payment
The agreement should state whether the payment qualifies for the Section 188 exemption (first £30,000 tax-free) and any payment above that is taxable. This is important for your tax position.
You waive your right to bring claims covered by the agreement. Once you sign, you usually cannot bring a tribunal claim for issues covered by it.
What you should negotiate in a settlement agreement
A settlement agreement is a negotiation. The figure your employer puts in is usually not their final offer. Here's what you should push for:
1. The payment amount
Start by valuing your potential tribunal claim (unfair dismissal compensation can reach £123,543+). Work backwards from there. Deduct costs (legal fees, tribunal time, risk of losing). The settlement should be a meaningful percentage of your potential claim — solicitors often suggest a meaningful proportion as a starting point for a modest risk case.
Action: Submit a counter-offer in writing via your solicitor.
2. A positive or neutral reference
This is critical. Insist on agreed reference wording. Get it in writing in the settlement agreement. A poor reference can cost you future jobs.
Example wording: "John worked for us from Jan 2020 to April 2024 as a Senior Accountant. He left by mutual agreement."
3. Keeping equipment or benefits
If you have a laptop, phone, or other equipment, negotiate whether you keep it or must return it. For benefits like parking, membership, subscriptions — clarify who pays if you want to keep them.
4. Extended health cover or outplacement support
Request continuation of health insurance for a period (e.g., 6 months) or ask the employer to pay for outplacement services to help you find a new job. These have real value.
5. Removal of restrictive covenants
If your contract has non-compete, non-solicitation, or non-dealing clauses, push to have them removed or softened in the settlement agreement. These can seriously limit your next job options.
6. Wording of the confidentiality clause
Try to ensure the confidentiality clause doesn't prevent you from: (a) discussing the settlement with your spouse or solicitor, (b) disclosing information to a regulator if required by law, (c) defending yourself in any future legal action.
Red flags in a settlement agreement
You're being rushed to sign
If your employer is pushing you to sign within a few hours or a day, that's a huge red flag. ACAS recommends at least 3 days. Always take time to consider and get legal advice.
All-encompassing confidentiality
If the NDA clause prevents you from discussing the settlement with anyone including your spouse, solicitor, or a regulator — this is too broad and may not be enforceable. Push back.
You're waiving your right to claim personal injury if related to injury
If you have a work-related injury claim (e.g., stress, back injury), make sure the settlement doesn't waive that. Get separate legal advice on your PI claim.
Excessive restrictive covenants
Non-compete clauses lasting years or covering entire sectors can be unenforceable but are still a threat. Negotiate these down to reasonable scope and duration.
No tax treatment of the payment specified
The agreement should clearly state which parts are tax-free (under Section 188) and which are taxable. If not, you may face an unexpected tax bill.
COT3 vs settlement agreement
Both are legally binding ways to settle employment disputes, but they differ in important ways:
| Aspect | COT3 | Settlement agreement |
|---|---|---|
| What is it | An agreement reached through ACAS early conciliation | A direct agreement between you and your employer |
| Legal advice required | No | Yes (qualified legal adviser) |
| Cost | Free (ACAS provides conciliation) | Usually the employer pays £200-£500 toward legal fees |
| Binding | Yes, equally binding | Yes, equally binding |
| Flexibility | Less flexible — ACAS typically handles terms | More flexible — you can negotiate terms, references, payments |
Frequently asked questions
Without prejudice settlement offer
Legal protection for settlement negotiations.
ACAS early conciliation
Settlement through ACAS conciliation.
Unfair dismissal compensation
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Employment Rights Act 1996