What Are Settlement Agreements?

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Settlement agreements are exchanges that end problems within an employment relationship quickly and privately, benefiting both parties. Employers occasionally provide them as a substitute for official capability, disciplinary or redundancy procedures.

A settlement agreement could previously only be used to resolve an existing ‘dispute’. A change in the law now allows employers to have ‘protected conversations’ with employees so they can discuss settlement on a ‘without prejudice’ basis, even before a dispute arises.

This new ruling means settlements are sometimes employed when a personality conflict is to blame for the problem rather than a disciplinary or competency issue.

What A Settlement Agreement Will Usually Contain

As settlement agreements are used to quickly end disputes, both parties must be satisfied. This principle means that your employer will offer you compensation for cutting your employment and agreeing to keep the situation confidential.


The compensation amount your employers will offer is usually based upon a formula that applies to your circumstances. The figure may be based on your statutory or contractual redundancy compensation, plus an additional amount to encourage you to sign the agreement. Sometimes, it will be based on the amount of time it would take your employer to conduct a capability or disciplinary procedure.

The first £30,000 of any compensation payment will be paid free of tax and national insurance. This sum includes any amount to cover statutory redundancy pay.

If your payment is going to include pay instead of notice, accrued holiday and your final salary pay, it will be subject to tax and national insurance deductions.

When debating whether to accept the sum offered, consider the costs of litigating a claim, such as legal fees that you would not be able to recover, the time and stress of tribunal proceedings, plus the advantages of an agreed reference. Remember that even if you win an Employment Tribunal case, the tribunal cannot order the employer to give you a reference. Sometimes, this reference is the most crucial element of your settlement agreement.

If you do not receive your compensation, you should inform a solicitor. They will contact your employer on your behalf to ensure it is paid. If this contact is ineffective, you can bring a breach of contract claim in the civil courts or, if you are still employed and the compensation is under £25,000, a claim in an Employment Tribunal. In reality, few employers will refuse to pay the compensation payment as it is not in their interests to do so.

Legal Fees

Employers have no legal obligation to contribute towards your legal fees, but virtually all of them do. The amount varies depending on the employer, the nature of their business and sometimes their location.

In straightforward cases, where you are happy with the offered terms, the employer’s contribution will usually cover all of your legal fees and there will be nothing extra to pay. 


Employer references are often a central element of settlement agreements, as they help the dismissed employee find new employment. 

Perhaps your employer has offered you a standard reference simply confirming the dates of your employment and your job title. You should not worry about this simplicity too much as nowadays the vast majority of employers give a standard reference along these lines. As these references are so common, prospective employers are not usually troubled by them and won’t assume you have anything to hide. If you would like an enhanced reference, you can ask your employer and they may agree.

Employers have no legal obligation to give a reference, only to provide a reference that is fair, accurate and not misleading. Therefore, if you are facing dismissal for misconduct, your employer may be reluctant to give any reference. However, solicitors may be able to help you negotiate a standard reference.


One of the reasons employers offer settlements is to keep all details of a dispute and compensation payment strictly confidential. Breaching this term would void the agreement.

The agreement often lists who you are allowed to tell about your settlement. These individuals usually include; members of your immediate family, your legal adviser and HMRC.

However, this confidentiality doesn’t apply to whistleblowing and the agreement should contain a clause stating that nothing in the agreement shall prevent the employee from making a protected disclosure (blowing the whistle) under Section 43A of the Employment Rights Act 1996.

It is also common for the agreement to ban derogatory comments about your employer. Remember not to discuss them on social media as, even if you use privacy settings, your comments can still be copied and forwarded to others.

Legal Advice On Settlements

Settlement agreements are only legally binding if you have taken independent legal advice from a solicitor (or another authorised representative). This restriction is crucial as you are waiving your rights to bring any further claims against your employer and agreeing to comply with several other terms.

You can choose your own solicitor and do not have to use the solicitor recommended by your employer. Even if a solicitor has been recommended by your employer, they have a duty to be independent and act in your best interests, not your employer’s.

‘Without Prejudice And Subject To Contract’

This phrase is often used in correspondence from your employer proposing or attaching the draft settlement agreement. When negotiating the agreement, this principle allows the parties to speak openly without the danger of their words being used as evidence against them should discussions fail. 

Under normal circumstances, neither party is legally bound by anything agreed in negotiation until the final written agreement is signed and dated. Signatories should include yourself, the employer and your solicitor. 

Common Complications 

There are a few terms typically included in settlement agreements that can cause some confusion:


Under Section 91 of the Pensions Act 1995, it is impossible to waive any accrued pension rights (except in very limited circumstances). Your Settlement should include a clause saying the waiver will not apply to accrued pension rights. 

Personal Injury Claims

Your employer cannot and should not exclude a personal injury claim which has not yet arisen or that you are not yet aware of. This ruling may sound odd, but it could happen where, for example, you have been exposed to chemicals in the workplace, and your injury only develops several years after the agreement is signed.

The settlement can waive claims for personal injury arising from harassment or unlawful discrimination. 

If you have a current personal injury claim against your employer, you will either need to settle that as well or ensure that the agreement contains a clause that clearly states that this claim is ongoing and will not be waived.

Employee Warranties

It is common practice for warranties from the employer to be included in the settlement agreement.

It is essential to pay particular attention to these warranties. If you breach them, the employer could either withhold your payment or commence Court proceedings against you for the losses caused by your breach. These losses typically include the compensation sum (if that has already been paid to you) and the costs of initiating and conducting legal proceedings.

Typical warranties include:

  • That you won’t breach the confidentiality agreements
  • That you have not committed a repudiatory breach that would entitle your employer to dismiss you without notice for Gross Misconduct
  • That you have not already received an offer of employment
  • Suppose you have already received an offer of new employment. In that case, it’s possible to negotiate this warranty out, especially if the Settlement Agreement is not the result of a hotly disputed or controversial issue.

Restrictive Covenants

Restrictive covenants are agreements written into the employment contracts of senior executives with valuable and confidential information, trade secrets or strong links with the employer’s clients and customers. They protect an employer from this information being used against them. 

Sometimes a settlement agreement will ask an employee to reaffirm that they will abide by the covenants in their original employment contract. Employers will often pay an additional sum, usually between £10 and £100, in exchange for the employee’s reaffirmation. If you have restrictive covenants in your contract, this clause can be more important than negotiating the compensation payment itself. 

Do I Have To Sign?

If you don’t want to sign a settlement agreement, you don’t have to. You may be confident that you can overcome any difficulties posed by the disciplinary or capability procedure, and you will be able to carry on working for your employer.

Or you may be confident that an Employment Tribunal claim would succeed and your eventual compensation would be far greater than the current offer. In reality, most employees facing disciplinary or capability proceedings are keen to leave that employment on agreed terms and start afresh elsewhere.

The ACAS Code of Practice on settlement agreements states that intimidating and aggressive negotiating is improper behaviour that will forfeit the ‘without prejudice’ rule. Exerting undue pressure on a party, threatening to dismiss them if they don’t sign the agreement and discrimination are also considered improper behaviour. 

It is not improper for an employer to say that if the settlement cannot be agreed upon, then disciplinary or capability proceedings will go ahead. However, it would be improper for the employer to say that the employee will be dismissed at the end of those disciplinary or capability proceedings.

If the company refuses to sign the agreement, an employee may not threaten to harm the organisation’s reputation unless the Public Interest Disclosure Act of 1998 is in effect (whistleblowing).

The ACAS Code of Practice also states that employers should give employees at least ten days to consider an offer, take legal advice and sign the agreement.

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Legal Disclaimer.

All advice is correct at time of publication.