If you have been presented with a settlement agreement by your employer, you are likely navigating a significant moment in your working life — and you probably have a lot of questions. This guide explains everything you need to know about settlement agreements: what they are, what they cover, what your rights are, and how to get advice quickly and at no cost to you.
Key takeaways
What you need to know
- A settlement agreement is a legally binding contract between you and your employer — typically involving a financial payment in exchange for waiving certain employment claims.
- Signing is always voluntary. You cannot be forced to sign a settlement agreement.
- Independent advice is a legal requirement. Without it, the agreement is not valid or binding.
- In most cases, your employer covers the legal fee as part of the agreement.
- Not all termination payments are tax-free — the tax treatment depends on the nature of each payment.
- There are certain claims that cannot be waived in a settlement agreement, including accrued pension rights and personal injury claims that have not yet arisen.
What is a settlement agreement?
A settlement agreement (previously called a compromise agreement) is a legally binding contract between you and your employer. It sets out the terms on which your employment ends — or, in some cases, continues under new terms — and in exchange for those terms, you typically agree not to bring certain legal claims against your employer.
In most cases, a settlement agreement involves your employer making a financial payment to you. In return, you agree to waive your right to bring claims such as unfair dismissal or discrimination in an employment tribunal.
Settlement agreements are most commonly used in the following situations:
- When employment is ending by mutual agreement
- As part of a redundancy process
- To resolve an existing workplace dispute without legal proceedings
- To vary the terms of ongoing employment
- Following a period of performance management or disciplinary proceedings
It is important to understand from the outset that a settlement agreement is a significant legal document. Before you sign anything, you are entitled — and legally required — to receive advice from a relevant independent adviser, such as a solicitor.
Do you have to sign?
No — signing a settlement agreement is always voluntary. Your employer cannot force you to sign one, and you should never feel pressured to do so without fully understanding the terms.
That said, it is important to understand what happens if you choose not to sign. If you decline, your employer is not obliged to keep the settlement offer open. They may instead proceed with whatever process they had in mind — whether that is a formal redundancy, a performance management process, or a disciplinary procedure. The settlement agreement is often presented as an alternative to that process. For more detail, see our article on what happens if you don't sign a settlement agreement.
This does not mean you should sign without question. It means you should take the time to understand what you are agreeing to, what you are giving up, and whether the terms on offer are reasonable — which is precisely what independent legal advice is designed to help you do.
Important
Once you have signed a valid settlement agreement, it is legally binding and very difficult to set aside. Getting proper advice before signing — not after — is essential.
What does a settlement agreement cover?
Every settlement agreement is different, but most will cover some or all of the following areas. Your adviser will explain each clause to you in detail.
Termination payment
The financial amount your employer is paying you. This may include your statutory or contractual notice pay (whichever is greater), a holiday payment, a redundancy payment, and/or an ex gratia payment (an additional sum paid as a gesture of goodwill, without legal obligation). See our article on how settlement agreement figures are calculated for more detail.
Waiver of claims
This is the core of a settlement agreement — the list of legal claims you are agreeing not to pursue. Common claims waived include unfair dismissal, wrongful dismissal, discrimination, harassment, unpaid wages, unpaid holiday pay and breach of contract.
Reference
Many settlement agreements include an agreed reference — a form of words that your employer will use if contacted by future employers. In some cases, references can be negotiated.
Confidentiality
Many settlement agreements include a confidentiality clause preventing you from discussing the terms of the agreement with anyone other than your immediate family or professional advisers. Some include broader non-disparagement clauses preventing you from making negative comments about your employer. The scope of these clauses matters and should be clearly understood before you sign.
Restrictive covenants
Your employment contract may already contain restrictions on what you can do after leaving — such as not working for a competitor or not approaching clients for a specified period. The settlement agreement may confirm or vary these restrictions. Post-termination restrictions are only enforceable to the extent that they go no further than is reasonably necessary to protect a legitimate business interest.
Garden leave and notice
The agreement will usually confirm your notice period and whether you will be paid in lieu of notice, whether you are required to work your notice period or whether you will be placed on garden leave (this is where you are paid but not required to attend work). The end date of your employment will be set out clearly.
Return of property
You will typically be required to return any company property — laptop, phone, access cards, documents — by a specified date.
Announcements
The agreement may include agreed wording for any internal or external announcement about your departure. This is worth reviewing carefully if reputation matters to you professionally.
"Every settlement agreement is different. Understanding what you are agreeing to — and what you are giving up — is exactly what independent legal advice is designed to help with."
The legal requirement for independent advice
A settlement agreement is only legally valid if you have received advice from a relevant independent adviser before signing. This is not simply good practice — it is a statutory requirement under the Employment Rights Act 1996 and related legislation. Without it, the statutory conditions for waiving the specified claims would not be satisfied.
Your adviser must:
- Be a qualified lawyer, a certified officer, official, employee or member of a trade union or a certified advice centre worker
- Be independent of your employer
- Advise you specifically on the terms and effect of the agreement and, in particular, its effect on your ability to pursue your rights before an employment tribunal
- Hold professional indemnity insurance covering the advice given
The relevant independent adviser, who will be identified in the settlement agreement, should sign an adviser's certificate confirming they have done all of the above. The adviser's certificate is then returned to your employer alongside the signed agreement to complete the process.
About this service
All legal advice — including the review of your settlement agreement, the advice provided to you, and the issuing of your adviser's certificate — is provided by Nexa Law Limited, authorised and regulated by the Solicitors Regulation Authority.
How much does it cost?
For employees, independent legal advice on a settlement agreement is typically free. This is because it is standard practice for employers to include a contribution to the employee's legal fees within the settlement agreement itself.
We cap our fees at the amount your employer has agreed to contribute, meaning that in the vast majority of cases — where no negotiation is required — you pay absolutely nothing for the review, the advice and the adviser's certificate.
If your situation is more complex and requires negotiation or additional work beyond a straightforward advice-only instruction, we will always be upfront and transparent with you about any costs before proceeding.
"In most cases, you will pay nothing. Your employer covers the cost of your legal advice as part of the settlement — this is standard practice across all industries."
How the process works
Our service is designed to be as simple and stress-free as possible. Here is what to expect:
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1Get in touch
Submit the contact form, email or call us. We will ask a few straightforward questions to get you onboarded.
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2Share your documents
Send us your settlement agreement, your employment contract and any other relevant documents — such as an employee handbook — securely. We will tell you exactly how to do this.
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3Receive your advice
Within 24 hours of onboarding, you will receive clear, jargon-free advice — by email or call, whichever you prefer. We will explain every clause, answer your questions and tell you exactly what you are agreeing to.
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4Sign-off and certificate
Once you are happy and ready to proceed, we complete the sign-off formalities and issue your adviser's certificate confirming you have received independent legal advice. This is returned to your employer to complete the process.
The entire process is handled remotely — there is no need to visit an office. Advice is available to employees anywhere in England and Wales.
Ready to get advice on your agreement? Get in touch today — advice is provided within 24 hours of onboarding and is free to employees.
What to look out for before you sign
Before any settlement agreement is signed, these are the key areas your adviser should review with you carefully:
| Area | What to consider |
|---|---|
| Financial payment | Does it reflect your notice entitlement, any redundancy payment due and, where relevant, any additional compensation for the claims being waived? |
| Waiver of claims | The list of claims being waived should be specific. There are certain types of claims that cannot be waived (such as claims in respect of accrued pension rights, personal injury claims that have not yet arisen and claims in respect of certain statutory rights). |
| Restrictive covenants | Post-termination restrictions that are too wide in scope or duration may be unenforceable, but they can still cause practical difficulties with a new employer. |
| Reference | An agreed reference has real value — make sure the wording is accurate and acceptable to you. |
| Outstanding sums | Check whether the agreement addresses any bonuses, commission or benefits owed to you beyond the termination payment. |
| Confidentiality | Some clauses are drafted very broadly. You should be clear on what you can and cannot say, and to whom. |
| Termination date | Verify your last day of employment and ensure your notice period is dealt with correctly. |
Frequently asked questions
Can I negotiate my settlement agreement?↓
Yes, in many cases elements of a settlement agreement can be negotiated — including the financial payment, the reference wording, the scope of any restrictive covenants, or the treatment of outstanding bonuses.
How long do I have to consider a settlement agreement?↓
There is no statutory minimum period for considering a settlement agreement. However, the ACAS Code of Practice recommends that employees are given a reasonable period of time to consider the proposed settlement agreement — generally at least 10 calendar days. In practice, employers set their own deadlines. If you feel you have been given insufficient time, this is worth raising with your adviser.
Can I use a settlement agreement if I am still employed?↓
Yes. Settlement agreements are not only used when employment is ending. They can also be used to resolve a workplace dispute or change your terms of employment while you remain in your role. If your employer has presented you with a settlement agreement in any circumstances — whether your employment is continuing or coming to an end — we can help.
What is a 'without prejudice' conversation?↓
A without prejudice conversation is a discussion between you and your employer that cannot be used as evidence in legal proceedings. For discussions to be protected under 'without prejudice' there must be an existing dispute, a genuine attempt to settle that dispute and no serious wrongdoing during the discussions. Settlement agreements can be preceded by a without prejudice conversation in which the offer is made. The purpose is to allow both parties to speak frankly about settlement without fear that their words will be used against them if negotiations break down. If negotiations break down and no agreement is reached, you are generally free to pursue your claims as if the conversation never took place.
What is a protected conversation?↓
A protected conversation (or a pre-termination negotiation) is a specific statutory concept introduced at section 111A of the Employment Rights Act 1996 by the Enterprise and Regulatory Reform Act 2013. It allows employers to have discussions with employees about ending employment — even where there is no existing dispute — without the content being admissible in unfair dismissal proceedings, unless there is an 'automatically' unfair reason or improper behaviour during settlement discussions.
Can my employer withdraw the settlement agreement offer?↓
Yes. Until a settlement agreement has been signed by both you and your employer and the adviser's certificate has been issued, the offer is not legally binding on either party. Your employer is entitled to withdraw the offer at any time before that point, just as you are entitled to decline it. This is one of the reasons it is important to move promptly once you have decided you are happy to proceed — we aim to complete the process within 24 hours of onboarding precisely to avoid unnecessary delay.
Are payments made under a settlement agreement tax-free?↓
Not all termination payments are tax-free. The tax treatment depends on what the payment is for and how it is classified for tax purposes. Some payments made under a settlement agreement are generally taxable in full, such as your salary or unpaid wages, payments relating to your notice period, accrued holiday pay and bonus and commission payments. Certain compensation payments for loss of employment (which can include redundancy pay and certain ex gratia payments), however, can generally be paid tax-free up to £30,000. Although it should be noted that the £30,000 limit applies once per employment, not once per payment.
What happens to my pension and benefits?↓
The pension rights you accrued up to the date of termination belong to you. The settlement agreement should be reviewed to ensure it addresses any outstanding pension contributions. Other benefits — such as private medical insurance, life assurance, company car or share options — will also need to be considered and may require separate arrangements.
Does my employer pay my legal fees?↓
In the vast majority of cases, yes. Whilst it is not a legal requirement, it is standard practice for employers to include a contribution to the employee's legal fees within the settlement agreement itself. The contribution is usually expressed as a fixed sum and is paid directly to your adviser. We cap our fees at the amount your employer has agreed to contribute, meaning that where no negotiation is required, you pay absolutely nothing. If anything falls outside of this, we will always tell you upfront before any additional costs are incurred.
Can I tell my family about the settlement agreement?↓
Most settlement agreements permit disclosure to your immediate family and your professional advisers — even where a confidentiality clause is in place. The confidentiality clause is typically aimed at preventing disclosure to the media, former colleagues or the general public. Your adviser should check the specific wording of your agreement and advise you on what you can and cannot share.
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Contact us today to get advice on your settlement agreement. The service is fully remote, available anywhere in England and Wales, and free to employees (your employer covers our fees).
Get in touch →This guide provides a high-level overview for general information purposes only and does not constitute legal advice. It should not be relied upon as a substitute for specific legal advice tailored to your individual circumstances.
Should you choose to formally instruct us, legal services will be provided by Nexa Law Limited. Employment Settlement Solicitor is a trading name of RJB Legal Services Ltd, a limited company registered in England and Wales with number 17353836. RJB Legal Services Ltd does not provide legal advice. RJB Legal Services is a consultant practice of Nexa Law Limited, a limited company registered in England and Wales with number 10209198, which is authorised and regulated by the Solicitors Regulation Authority under SRA number 633024.