Settlement Agreements

Our team of expert employment lawyers will ensure you have considered all aspects of the agreement before an offer is made and provide strategic advice during any subsequent negotiations.

Settlement Agreements

What is a Settlement Agreement?

Settlement agreements (previously called compromise agreements) are a legally binding contract where an individual waives their right to bring the employment tribunal claims listed in the agreement – usually in return for a payment.

There are set conditions that the agreement must include in order to be legally binding, but otherwise there are a voluntary, commercial contract that can be agreed between an employer and employee.

When should a Settlement Agreement be used?

They are often used to solve a problem or dispute or, most frequently, to shortcut a termination process.

They are mainly used to terminate an employee’s employment and protect the business from a subsequent employment tribunal claim. There are however some statutory claims that cannot be settled. 

They are also often used in corporate transactions when a business is bought or sold.

Key settlement agreements guidance for employers

  • Establish the reason for offering the settlement agreement and be prepared to explain this to the employee.
  • Understand the employee’s current position
  • Is the employee currently aware of the business concerns? Has an informal process been conducted? Or will this be a complete surprise?
  • Payment – how much of a financial incentive will be offered in addition to any contractual entitlements? How has this been calculated? What’s the taxable status of the payment? Typically agreements on termination include:
    • Salary until the termination date (subject to the usual PAYE deductions);
    • Notice period – will this be worked or paid in lieu. Either way this is subject to tax and NIC deductions and cannot be paid tax free;
    • Any accrued but untaken holiday to the termination date;
    • A compensation payment – depending on the circumstances of the payment, there can be a payment free from income tax and NIC of up to £30,000.
  • The employee must be given 10 calendar days to consider the written terms of the agreement (not just the offer).
  • What is Plan B if they refuse?


Use our Settlement Agreement Checklist to help you make a decision 

Specialist Settlement Agreement legal advice

Settlement Agreements can often be a very useful tool when used correctly. However issues can often arise when an offer is made prematurely before the details have been thought through. Protracted negotiations can then arise which often leads to a more expensive exit – it’s therefore important to properly plan ahead before taking action.

If you have a question about a Settlement Agreement, or any employment or HR issue, please contact our team of expert employment solicitors in Bristol or London. Call 0117 906 9400, email or use the contact form.

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