Settlement Agreement Advice

Settlement Agreement Advice

You've been offered a settlement agreement by your employer. What does it mean and what should you do next?

If your employer has given you a deadline, then it is vital that you take legal advice before deciding whether to accept. Once the agreement takes effect, you will usually lose the right to bring the claims it covers. Before signing, ensure that you understand the terms on offer, the claims you are giving up and any ongoing obligations that could affect your future employment or career.

What Is a Settlement Agreement?

A settlement agreement is a legally binding agreement under which an employee or worker agrees to waive specified employment claims — usually in return for a financial payment or other agreed benefits.

This agreement can offer various benefits — such as avoiding stressful and expensive legal disputes in the employment tribunal.

To validly settle statutory employment claims, the agreement must satisfy certain legal requirements. This includes the need for it to be in writing, relate to specific complaints and that the relevant individual receives independent advice on the agreement (with the advisor insured and identified). This is why employers require employees to obtain independent legal advice prior to signing.

Why Have I Been Offered a Settlement Agreement?

Settlement agreements can often arise in contentious or challenging circumstances.

These may include redundancies, disciplinary and performance processes, workplace disputes, grievances and other situations where the parties wish to bring the employment relationship (or a specific dispute) to an agreed close.

Either party can propose a settlement agreement — employers often raise the possibility through a protected conversation or (where a dispute already exists) on a without prejudice basis.

What Does a Settlement Agreement Usually Include?

A settlement agreement typically sets out the financial terms of an employee's exit and any obligations that continue after employment ends. Employers often include protections favouring them, such as confidentiality obligations.

The agreement typically covers issues spanning compensation, notice pay, accrued holiday pay, redundancy payments, bonuses and commission, benefits, legal fees, agreed references, restrictive covenants and the claims the employee agrees to waive.

For senior employees, directors, and executives, it may also address share options, incentive arrangements, pension benefits, private medical cover, company vehicles, directorships and other entitlements. The parties may also agree references where reputation and future career prospects are important.

The agreement should clearly identify the claims being waived as these are usually settled permanently once the agreement takes effect. However, a settlement agreement cannot prevent an individual from making certain disclosures, such as a protected whistleblowing disclosure.

How Are Settlement Agreement Payments Taxed?

The tax treatment of a settlement package depends on the nature of each payment.

Salary, holiday pay, bonuses, garden leave payments and notice related payments are generally taxable and subject to National Insurance where applicable. Up to £30,000 of certain qualifying termination payments may be paid free of income tax.

Where the package includes share schemes, incentive arrangements or substantial benefits, specialist tax advice may also be required.

Negotiating a Settlement Agreement

Settlement agreements are often negotiated, sometimes heavily depending upon the circumstances.

Whilst compensation is often the primary focus, negotiations may also extend to matters concerning references, the scope of restrictive covenants, confidentiality obligations, benefits, incentive arrangements and other issues.

The strength of an employee's negotiating position will depend upon factors such as their potential claims, likely financial loss and the employer's position if settlement is not achieved. Commercial and reputational considerations may also be relevant — particularly in senior departures.

The Acas Code recommends that employees should normally be given at least 10 calendar days to consider a written settlement agreement and obtain independent advice.

From 1 October 2026, the time limit for bringing most Employment Tribunal claims will increase from three months to six months for claims arising on or after that date. From 1 January 2027, the qualifying period for ordinary unfair dismissal will reduce from two years to six months and the statutory cap on compensatory awards will be removed. These changes may affect the value of potential claims and the approach to settlement negotiations.

Settlement Agreement Legal Fees

Employers will commonly contribute towards their employee's legal fees towards settlement agreement advice.

In many straightforward cases, that contribution may cover all or most of the legal costs involved. Where additional advice, negotiations or specialist input are required, the relevant advisor should explain any additional fees in advance before starting work.

How We Can Help

We advise employers and employees on settlement agreements, negotiated exits and workplace disputes.

We also draft robust agreements and advise employers on conducting settlement discussions correctly. We help manage the negotiation and documentation process, allowing employers to focus on running their business and helping employees secure a suitable outcome.

Related Employment Law Services