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Settlement Agreements FAQs

What is a Settlement Agreement?

A Settlement Agreement is the formal name given to a termination agreement between an employer and an employee. It was previously known as a Compromise Agreement. The effect of you signing a Settlement Agreement is that in exchange for the termination payment and any other benefits which your employer agrees to give you, you will be giving up most, if not all, of your employment related legal rights. This means that you would not be able to bring an unfair or wrongful dismissal claim, any form of discrimination claim, any breach of contract claim or claim for unlawful deduction from wages or any claim for annual leave or expenses due to you. The only claims that are normally (although not always) excluded from the scope of a Settlement Agreement are future claims in respect of personal injury and accrued pension rights.

When might I be given a Settlement Agreement?

Settlement agreements nearly always cover termination of employment although occasionally they can arise in circumstances where the employment is ongoing. A Settlement agreement can be used in situations such as:

  • Where there is, or is threatened to be, a legal dispute between the employer and the employee and the employer is prepared to pay some compensation to the employee to settle or prevent the claim being pursued in the Employment Tribunal.

  • Where the employee is being made redundant and the employer is offering an additional or enhanced payment over and above statutory or contractual entitlements

  • Where there is a difficult situation in the workplace or things are just ‘not working out’ and the employer and the employee are able to agree mutually acceptable severance terms to resolve the matter. (This might have been described as a ‘Protected conversation’ or ‘Confidential settlement negotiations’).

How will I know I’ve got a Settlement Agreement?

Settlement Agreements do not always look like a formal legal document and they do not even have to bear the words “Settlement Agreement”. Yours might be called a “Severance Agreement” or “Termination Agreement”. Alternatively it may just be in the form of a letter. The things to look out for are references to:

  • A requirement to take legal advice

  • Section 111A of the Employment Rights Act 1996

  • Names of Acts of Parliament and your right to go to an Employment Tribunal


If you are unsure whether you have a Settlement Agreement, please telephone and ask for our assistance.

Doesn’t a Settlement Agreement put the employer at an advantage?

It’s true that the employer draws up the agreement and therefore has control over the terms that go in it, but the employee is protected by the requirement that he or she must receive independent legal advice, normally from a solicitor. If we think the terms are unreasonably weighted against you, we can help you negotiate with your employer to improve them.

What does the Solicitor do?

The legal role of the solicitor is to advise you on your legal rights, particularly your right to bring an unfair dismissal claim, so that you understand exactly what you are giving up by signing the Agreement. But our service goes further than that. If your employer is not honouring all your entitlements or we do not think the compensation being offered is sufficient to justify you giving up your legal rights, we can negotiate on your behalf or equip you with the arguments to get a better package.

Do I really need a Solicitor?

Yes, even if you are entirely happy with the terms, you do. Without independent legal advice your agreement is not binding. Your employer could fail to pay you and you would not be able to do anything about it. We will provide you with a certificate or letter signed by our Solicitor to confirm that you have received legal advice.

I think my employer would respond better to comments from me rather than a Solicitor

If you want us just to advise you so that you can talk to your employer about your agreement yourself, that’s absolutely fine. We can equip you with all the information you need to negotiate on your own behalf. When you are happy with your agreement, we can check it again and provide you with a certificate or letter confirming you have received legal advice.

Are all payments under Settlement Agreements tax free?

No! As a rule of thumb you can receive a termination payment of up to £30,000 tax free. However, this does not apply to pay in lieu of notice or payments arising out of your contract such as salary, bonuses, payment in lieu of annual leave or other benefits. When we advise you on your agreement we will also be checking the tax status of the payments.

Does the Settlement Agreement only deal with money?

No – not at all. It can include a whole range of terms that cover return or retention of property, confidentiality and possibly restrictions on what work you can do after termination of your employment. It is also often possible to agree wording for a reference. This is why it is so important for you to get advice not just from any Solicitor, but from one who is a specialist in employment law and experienced in dealing with Settlement Agreements.

How do I go about getting a Settlement Agreement?

If you have a situation at work which you think may only be resolved by you leaving, we can advise you how to instigate a protected conversation, or we may be able to negotiate a Settlement Agreement for you.

Are there any time limits for signing a Settlement Agreement?

Your employer may set a deadline for signing your settlement agreement but you should be given at least 10 days to think about the offer and obtain advice before signing.

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