Guide

Settlement Agreements Explained

A settlement agreement is a legal contract that ends your employment and waives your rights to certain claims. Here is what they contain, what you give up, and how to negotiate yours.

What is a settlement agreement?

A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between you and your employer. In exchange for a payment and/or other benefits, you agree to waive your rights to bring certain employment tribunal claims against them.

Settlement agreements are voluntary — your employer cannot force you to sign one. Equally, you cannot generally require your employer to offer one. They are typically used to end an employment relationship on agreed terms where there is some uncertainty about legal claims, or where both parties want a clean break.

They are commonly used in redundancy situations, but also in performance management, disciplinary, and workplace dispute scenarios.

What rights you are waiving

By signing a settlement agreement, you typically give up the right to bring the following types of claim in an employment tribunal:

  • Unfair dismissal (including constructive dismissal)
  • Redundancy claims — including wrongful dismissal
  • Discrimination claims — on grounds of age, sex, race, disability, religion, sexual orientation, gender reassignment, marriage/civil partnership, pregnancy/maternity
  • Breach of contract claims
  • Wages and holiday pay claims
  • Flexible working and statutory rights claims

The exact scope of the waiver will be set out in the agreement. It should clearly list the specific claims being waived. You do not have to waive rights that are not explicitly mentioned in the document.

Note: You cannot waive rights that are not yet legally recognised — for example, future discrimination that has not yet occurred cannot be waived in advance.

What must be included in a valid settlement agreement

For a settlement agreement to be legally binding, it must:

  • Be in writing
  • Relate to a specific claim or specific type of claim
  • Confirm the employee has received independent legal advice — this is a legal requirement
  • Name the solicitor or advice body providing the independent advice
  • Specify that the employee has been given adequate time to consider the agreement
  • Show that the employee understands and accepts the terms

An agreement signed without independent legal advice is generally not binding — which is why employers will typically contribute towards or fully fund your legal costs as part of the agreement.

What you should negotiate for

Settlement agreements are negotiable. The initial offer is rarely the final offer, particularly if you have leverage — specialist skills, industry knowledge, strong relationships, or legitimate grounds for tribunal claims. Things you can negotiate include:

  • More money — the most obvious element. If you have a strong case, the employer may prefer to settle than risk a tribunal
  • Enhanced reference — a neutral or positive reference rather than a factual one
  • Outplacement support — career coaching, CV writing, interview training funded by your employer
  • Garden leave — being paid during the notice period without having to work
  • Waiver of post-termination restrictions — non-compete or non-solicitation clauses that could limit your next job
  • PHI benefits — permanent health insurance if you have a long-term illness or disability
  • Legal costs — the employer should pay for your independent legal advice, but you can negotiate the scope
  • Announcement terms — what is said to your colleagues and how your departure is framed
  • Intellectual property — particularly relevant for senior employees or those with creative/technical roles

Getting advice

You are legally required to take independent legal advice before signing a settlement agreement. Your employer should contribute towards or cover the cost of this advice as part of the agreement — this is standard practice.

Where to get advice:

  • A qualified employment solicitor — many offer free or fixed-fee initial consultations and specialise in settlement agreements
  • ACAS — free, confidential guidance on whether a settlement offer is fair: 0300 123 1100
  • Citizens Advice — for general guidance on your employment rights
  • A trade union representative — if you are a union member, your union may provide legal advice as part of your membership

Do not sign without reading the full document. Take it away, sleep on it, and seek advice before committing.