Settlement Agreements (UK): Practical Guide for Employers & Employees
Last reviewed: 4 November 2025
Prepared by our Employment Law Team– this note is general guidance and not legal advice.
What is a settlement agreement?
A settlement agreement is a legally binding contract used to resolve an employment dispute or to bring the employment relationship to an agreed end. In exchange for agreed outcomes (often including a payment), the employee waives specified legal claims against the employer.
When are settlement agreements used?
Typical scenarios include:
- Performance or conduct exits,
- Redundancies (especially where enhanced payments are offered)
- Grievances or discrimination allegations
- Relationship breakdowns
- Settlement of live or threatened Employment Tribunal claims.
They can also be used to settle a discrete dispute (for example, a bonus or holiday pay issue) without ending employment.
Legal requirements for a valid agreement
Under section 203 Employment Rights Act 1996 (ERA 1996), a settlement agreement is only enforceable if all the following apply:
- The agreement is in writing.
- It relates to particular complaints or proceedings.
- The employee has received advice from a relevant independent adviser (a qualified lawyer, certified trade union official or certified advice centre worker) on the terms and effect of the agreement, in particular its impact on the ability to bring Tribunal claims.
- The adviser is identified in the agreement and has insurance/indemnity cover.
- The agreement states the statutory conditions have been met.
Process and timelines
1. Opening the conversation:
Offers can be initiated by either side. Employers may use a “pre-termination negotiation” (a “protected conversation”) in unfair dismissal contexts under s.111A ERA 1996. The employer should be clear that it's a confidential and "without prejudice" discussion, and avoid any undue pressure or "improper behaviour”. Common law without prejudice rules and the Acas Code on Settlement Agreements will also be relevant depending on the circumstances.
2. Written offer and draft:
The employer typically provides a written offer with a draft agreement, headline financials, and any proposed reference.
3. Time to consider:
The Acas Code of Practice recommends allowing at least 10 calendar days for the employee to consider the offer and obtain advice (more may be reasonable depending on context).
4. Independent legal advice:
Because advice is legally required, it is standard practice for the employer to contribute towards the employee’s legal fees. The contribution amount varies, but typically ranges between £350-1,000 plus VAT.
5. Negotiation of terms:
Typical points to refine include tax wording, timing of payments, reference wording, confidentiality carve-outs and post-termination restrictions.
6. Signing and completion:
Execution occurs after advice is given.
How long does the process take?
Straightforward matters often conclude within 1–3 weeks; contested or complex exits can take longer (for example, where allegations are in play or references and restrictions require detailed negotiation).
Typical terms (what you’ll usually see)
Financial terms
- Ex-gratia/termination payment: Often expressed as damages for termination. The first £30,000 of qualifying termination payments may be paid free of income tax and NICs (subject to statutory rules). Amounts treated as earnings (e.g., contractual bonuses, holiday pay, compensation for new restrictive covenants) are fully taxable
- Notice and PENP: If notice is not worked, Post-Employment Notice Pay (PENP) rules can deem part of the payment to be taxable as earnings; PILON and “gardening leave” are taxable. Statutory redundancy pay remains outside PENP.
- Legal fees contribution: A fixed employer contribution towards the employee’s independent advice.
- Benefits and share schemes: Treatment of bonuses, LTIPs, options and shares should be explicit and coordinated with plan rules.
Non-financial terms
- Mutual confidentiality and non-disparagement: With clear carve-outs for protected disclosures, reporting to regulators/law enforcement, medical and legal advisers, and immediate family.
- Agreed reference: Annexed and internal/external announcements drafted to ensure consistency.
- Waiver of claims: Scheduled listed; typically excludes accrued pension rights, latent personal injury claims unknown at the date of signing, and enforcement of the agreement itself.
- Warranties: For example, that no undisclosed claims exist; that confidential information has been returned.
- Repayment/”clawback”: Limited to material breach of specified core obligations (e.g., confidentiality or post-termination restrictions) and usually subject to notice and cure.
- Post-termination restrictions: Either a restatement of existing restrictions (with confirmation of continued enforceability) or negotiated variations; consideration and reasonableness remains key for enforceability.
- Full and final settlement: Wording tied to identified statues and causes of action.
Frequently Asked Questions
1. Do I have to sign?
No. Settlement is voluntary for both sides. The Acas Code recommends at least 10 calendar days for consideration and advice.
2. Who pays for the advice?
It is common for the employer to contribute a fixed amount towards the employee’s legal fees to facilitate the mandatory advice requirement. The contribution typically ranges between £350–£1,000 plus VAT, though there is no legal obligation to offer it.
3. Can confidentiality stop me raising concerns?
No. Confidentiality and non-disparagement provisions must not prevent protected disclosures, reporting crimes, or cooperating with regulators. Good drafting will make these carve-outs explicit.
4. Can I change my mind after signing?
Generally no - once both parties have signed and the agreement is valid, it is binding. Any variation would require mutual consent in writing.
5. How long should I be given to consider the offer?
At least 10 calendar days under the Acas Code, though more may be reasonable depending on the circumstances.
Need further clarity?
Our Employment Solicitors advises both employers and employees on the preparation, review and negotiation of settlement agreements.
Contact us for a confidential discussion.
