Settlement agreements: how a UK employer ends employment without a claim

A settlement agreement is a contract in which an employee gives up the right to bring employment claims (unfair dismissal, discrimination, unpaid wages and so on) in return for a payment and other terms. It used to be called a compromise agreement. It is the only way, apart from a conciliated agreement through Acas, in which an employee can validly waive statutory employment rights: a clause in an ordinary contract saying "you agree not to sue" is void.

Section 203 of the Employment Rights Act 1996 (and the equivalent provisions in the Equality Act and other statutes) require that the agreement:

• is in writing;
• relates to the particular proceedings or complaints, so a general waiver of "all claims" is not enough, and the agreement should list the claims being settled;
• follows advice to the employee from a relevant independent adviser, usually a solicitor, on the terms and their effect on the employee's ability to pursue the claims;
• names the adviser, who must be covered by professional indemnity insurance;
• states that the statutory conditions are satisfied.

The adviser's certificate is attached. Because the employee must take advice, the employer normally pays a contribution to the adviser's fee; this is standard and it is what makes the waiver stick.

Separate the payments. Contractual sums (salary to the termination date, accrued holiday, notice or pay in lieu, bonus already earned) are earnings and are taxed through payroll. The termination payment (compensation for loss of employment, an ex gratia sum) can be paid free of income tax and National Insurance up to £30,000, provided it is a genuine payment for the ending of employment and not disguised earnings. Since the 2018 rules, the notice element is always taxable as post-employment notice pay, whether or not notice is worked. Say in the agreement which payment is which, and that the employee is responsible for tax above the exempt amount, with an indemnity to the employer.

Confidentiality of the agreement and of the circumstances; an agreed reference and an agreed announcement to colleagues; a mutual promise not to make derogatory statements; return of company property and deletion of data; confirmation that restrictive covenants in the employment contract continue, or new ones; a warranty from the employee that they have not found another job and have not already brought a claim; and an acknowledgement that the employee is giving up the listed claims. Since 2024, confidentiality clauses cannot stop an employee from reporting a crime or cooperating with a regulator, and a well-drafted clause says so.

You can propose a settlement before any dispute exists. Section 111A of the Employment Rights Act makes a pre-termination negotiation inadmissible in an ordinary unfair dismissal claim, so the employee cannot later say "they had already decided to sack me". The protection has limits: it does not cover discrimination, whistleblowing or automatically unfair dismissal claims, and it is lost if there is improper behaviour, such as pressure to accept within hours or threats of dismissal if the offer is refused. Acas recommends giving at least ten calendar days to consider a written offer.

1. Decide the package: termination date, contractual sums, ex gratia amount, reference, fee contribution.
2. Hold a protected conversation and follow it with a written "without prejudice and subject to contract" offer.
3. Send the draft agreement with the list of claims and the adviser's certificate.
4. Allow time; the employee's adviser will usually come back with a few changes.
5. Sign after the termination date or with the termination date agreed; pay within the stated period, often 14 to 28 days.

A settlement agreement is binding only if it meets the statutory conditions, so use a document that already does. The settlement agreement template (£59) contains the claims schedule, the adviser's certificate and the tax wording, with notes on each choice. Pair it with the disciplinary and redundancy letters if a process has already started. For a senior employee, a discrimination allegation or a payment above the exempt amount, have the finished agreement reviewed for a fixed fee before it goes out.