Offered a settlement agreement? Here's what to do next

Settlement agreements are presented by employers as routine paperwork. They are not. They permanently waive your legal rights. Before signing anything, you need to understand what your case is worth, whether the offer is fair, and how to negotiate a better deal if it isn't.

Offered a settlement agreement? Understand it before you sign

Understand your settlement agreement

What is a settlement agreement?

A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer under which you agree to waive your employment rights — including the right to bring tribunal claims — in exchange for a financial payment and usually an agreed reference. It must be in writing, you must receive independent legal advice, and the adviser must sign a certificate confirming they have given advice.

Do I have to sign a settlement agreement?

No. You are never obliged to sign a settlement agreement. You can reject it, negotiate the terms, or proceed to Employment Tribunal instead. Rejecting a settlement agreement does not automatically mean you will succeed at tribunal — but it preserves your right to try.

How do I know if the settlement offer is fair?

Compare the offer to what you might realistically win at tribunal. For unfair dismissal, calculate your basic award (statutory redundancy formula) plus likely compensatory award (lost earnings, future losses). Add injury to feelings if there is a discrimination element. If the offer exceeds a realistic tribunal outcome, it may be worth accepting; if it falls well short, negotiate.

Can I negotiate a settlement agreement?

Yes. Settlement agreements are almost always the start of a negotiation, not a final offer. You can counter-offer, ask for a higher financial payment, negotiate the reference wording, or ask for the legal fees contribution to be increased. Employers usually expect negotiation.

What happens to my tribunal claim if I sign?

You permanently waive your right to bring the claims specifically identified in the agreement. Settlement agreements typically list every possible claim type — unfair dismissal, discrimination, breach of contract, wages — to ensure a clean break. Once signed and the adviser certificate is in place, the agreement is binding.

Settlement Agreements

Offered a settlement agreement? Here's what to do next

Last updated: April 2026

You must receive independent legal advice — no exceptions

First offers are rarely final — counter-offers are expected

Once signed, you cannot bring the waived claims at tribunal

What a settlement agreement actually contains

Settlement agreements follow a standard structure, though the specific terms are negotiable. A typical agreement will include:

The financial payment

Usually a combination of termination payment (which may have a tax-free element up to £30,000), notice pay (taxable), and potentially a contribution to your legal fees. The total is described as the "settlement sum" or "ex gratia payment."

The core of the agreement — a list of every employment law claim you are waiving. This typically includes unfair dismissal, wrongful dismissal, all heads of discrimination, wages claims, breach of contract, and any other employment right. This clause is intentionally comprehensive.

Confidentiality clause

You agree not to disclose the terms of the agreement or, sometimes, the circumstances of your departure. In practice, you can usually tell close family members and your solicitor, but not colleagues or the press. This clause should be mutual — your employer should also keep things confidential.

The agreed reference — either a factual reference confirming dates of employment and job title, or a fuller agreed form of words. This is negotiable and important. Get the wording agreed in writing as a schedule to the agreement.

Both sides agree not to make negative comments about the other. Like confidentiality, this should be mutual. Check whether it covers social media and online reviews.

Return of property / IP

Confirmation that you have returned or will return company property, devices, and documents. Also typically confirms any restrictive covenants (post-termination restrictions) that still apply.

How to evaluate whether the offer is fair

The most important question is: what would you realistically get at tribunal, discounted for the risk of losing and the time and stress involved? Here is a rough framework:

Tax on settlement payments

The first £30,000 of a genuine termination payment (above what you are contractually owed) is usually tax-free. Notice pay is taxable regardless of how it is labelled — HMRC's "post-employment notice pay" (PENP) rules apply. A good employment solicitor can advise on structuring the payment to maximise the tax-free element.

Settlement agreement questions answered

Offered a settlement? Find out what your claim is worth first.

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What could you actually be owed?

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