An employee’s guide to settlement agreements

Settlement agreements (formerly known as Compromise Agreements) are legally binding contracts made between you as an employee, and your employer, which settles claims that you may have against them.

A settlement agreement is usually used in connection with ending your employment, but could also be used where your employment is still on-going, but you and your employer want to settle a dispute that has arisen.

To give you further clarity, we have provided you with an employee’s guide to settlement agreements with all the information you may need.

What is a settlement agreement?

Settlement agreements are usually proposed by the employer as a way to prevent legal action being taken by an employee. Before entering into a settlement agreement, there are some important points to consider:

  • They are voluntary;
  • They can be offered at any stage of an employment relationship;
  • They are legally binding;
  • They waive your rights to make a claim;
  • The agreement must be in writing;
  • Be specific and cover all parts of the dispute;
  • Define exactly the terms you and your employer agreed to;
  • They usually include some form of payment to you and may often include a reference;
  • The legal costs are typically covered by your employer and therefore there is no additional costs for instructing us.

It’s important to note that once a valid agreement has been signed, you will be unable to make an employment tribunal claim about any type of claim which is listed in the agreement. Therefore if a dispute arose in the future, and is featured on the settlement agreement, you would not be able to take legal action.

What should I do if I’m offered a settlement agreement?

If your employer offers you a settlement agreement, you need to think about the following:

  • How strong is my case?
  • How far off their offer is from what you could get at an Employment Tribunal?
  • What else you could do if you don’t accept the offer?
  • Is the stress of making a tribunal claim outweighed by what you could get if you win?
  • Are you willing to settle a dispute with your employer for money?
  • And if so, how much money would you deem acceptable?
  • Are you concerned about waiving your right to bring a claim against your employer?

It is important to get in touch with an employment solicitor to discuss the terms of the proposed settlement and obtain any further advice.

Call our employment solicitors free today on 0808 164 0808 for a no-obligation chat.

What is the settlement agreement process?

If you are offered a settlement agreement, you need to make sure the agreement sets out all the terms between you and your employer, i.e. termination date, payments owed, immediate and on-going obligations of each party, warranties, and so on. If you need help with this, please feel free to call us.

According to ACAS guidance, employers should give an employee a minimum of 10 calendar days to decide whether they want to accept a settlement agreement. Your employer should not demand that the agreement be signed straight away.

It is a legal requirement that before you sign the agreement, you take independent legal advice on what the agreement says. Once you have been advised by an employment solicitor and you are happy with the agreement, then all parties must sign to make the agreement legally binding.

What happens if I sign a settlement agreement?

If you sign a settlement agreement, you will not be able to bring a claim against your employer in the future. There are three exceptions to this (which should be set out in the agreement):

  • Your employer breaches the terms of your agreement;
  • Personal injury claims;
  • Your employer denies you your pension.

Can you negotiate settlement agreements?

Employees are often happy with the offer in their settlement agreement and decide to take it without reservation. However, this is not always the case when it comes to settlement agreement negotiations.

Generally speaking, settlement agreements can be concluded relatively quickly. If you are happy with the terms, then we will be able to finalise the agreement within a few days. In some cases, it can even be concluded on the same day. However, if further negotiations are needed, then this will mean that the process will take longer.

Whilst taking a claim to an employment tribunal is an option, and may be a good strategy for getting more money out of the settlement discussions, it is important to keep in mind that the process for employment tribunals can be lengthy.

The process can also be stressful and emotionally draining. There is no guarantee that you will succeed at the Employment Tribunal. Therefore, you may be more inclined to accept a settlement package rather than pursue a tribunal claim against your employer.

Reaching an agreement

If you reach an agreement with your employer, it is important that the agreement is clear and sets out everything you agreed upon. You do not want to have any gaps in what you can and cannot do going forward, because this could mean nasty surprises later on.

Can I tell anyone about my settlement agreement?

Most settlement agreements will include a confidentiality clause, which states that you must not talk about it to anyone other than:

  • Your immediate family or spouse;
  • Your employer;
  • Professional advisors such as solicitors.

Once you have received legal advice about the confidentiality clause, you can then discuss with your solicitor the parameters for talking about your settlement agreement.

Does a settlement agreement need to be witnessed?

In the vast majority of cases, it is not necessary for a settlement agreement to be entered into as a deed and be witnessed. However, this will largely depend on the specific drafting of the agreement and the terms that are being proposed.

Usually, you will not need an external witness to sign your settlement agreement, but you will need to obtain advice from a “relevant independent advisor” (a solicitor) on the terms of the settlement agreement. Once you’ve reached an agreement with your employer, it will need to be reviewed by your solicitor, who will then advise you on the terms and effect of the agreement.  Your legal advisor will need to sign the Advisor’s Certificate included in the settlement agreement.

Please note: We can usually help you that same day or within 24 hours. If you ask us to enter negotiations with your employer, this can usually be completed within a matter of days. Therefore, it is important that you contact us as early as possible.

What happens if you breach a settlement agreement?

Breaking a settlement agreement is by definition a breach of the agreement.

Sometimes the agreement will say that if you breach the agreement then any compensation payable under it will be repayable to your employer. You should be very careful to avoid breaching any terms of the agreement as this may result in legal and financial repercussions for you.

Will my employer give me a good reference?

There’s no legal requirement that your employer gives a reference on your behalf. If this is something you want to pursue as part of your settlement agreement negotiations, you can ask that a reference be included in the agreement.

Can a settlement agreement be rescinded?

A settlement agreement can only be rescinded or withdrawn if neither party has signed it.

Without both signatures, the agreement cannot be classed as a legally binding agreement, and can be discarded without prejudice. If you require further advice and guidance regarding agreements, or your employer has proposed an agreement that you’re unhappy with, get in touch with our settlement agreement solicitors.

Are settlement agreement payments taxed?

Generally speaking, the first £30,000 compensation for settlement payments is tax free, but this does not apply to all types of payment. Payments such as holiday pay or salary or notice will be taxed.

It is important to get the tax treatment right because HMRC may well claim tax later where payments have wrongly been made gross. Normally in a settlement agreement there will be a clause titled “tax indemnity”, which means that if an employer is later asked to pay the tax by the employee, the employer can then pursue the employee for that tax: plus interest, penalties and the cost of “grossing up”.

Will my settlement payment cover legal costs?

If your employer is in negotiations with you about a settlement agreement, they should cover the cost of any legal advice you seek about the settlement agreement. Depending on the situation you’re in, the settlement agreement payment should cover the cost of your legal fees.

If your settlement agreement relates to a more complex dispute with your employer, then you may need to discuss funding options with your employment solicitor.

Talk to our settlement agreement solicitors

Our employment team is headed up by Neha Thethi, who is highly experienced in helping employees settle all kinds of disputes with their employers.

Neha’s clients say:

“Professional and speedy. Take time so that you understand the contact and process…”

“Neha Thethi Head of Employment was professional, courteous and acted swiftly within the designated fees. She took the stress out of a very tricky situation. I am very grateful to Neha and team.”

“Neha Thethi was superb and I would highly recommend her.”

“Great experience with Lime Solicitors, Neha was very professional, provided constant updates and very efficient with a positive outcome. I will definitely recommend this service.”

If you’d like to have a chat with Neha and her team about a settlement agreement, call us free today on 0808 164 0808. Or, you can request a call back and one of our settlement agreement solicitors will call you.


In general you have three months less one day from the act of discrimination or breach to take action, meaning you should act fast.

We recommend you speak to one of our lawyers in the first instance. As part of the process, you’ll need to get in touch with the Advisory, Conciliation and Arbitration Service (ACAS), who will aim to achieve early conciliation with your employer. However, our lawyers can assist in this process where appropriate and when we have formally been instructed.

Please be aware that the ACAS process can take up to around 6 weeks to complete. It’s important to act quickly in order to bring a tribunal claim. If the conciliation procedure is unsuccessful, we may be able to support you with the tribunal process. If you feel you have a potential employment claim please act quickly and contact us today.