Your guide to settlement agreements

Your guide to settlement agreements

Being presented with a settlement agreement (formerly known as a compromise agreement) by your employer can be unsettling and worrying. Though circumstances vary, you are most likely to receive a settlement agreement when your employer is suggesting bringing your employment to an end.

We’ve produced this guide to help you understand what settlement agreements are, where you stand with them and why you need to obtain advice from a relevant independent adviser if presented with a settlement agreement. It’s all about getting the right advice, it’s not necessarily as simple as using a settlement agreement calculator to work out what it may mean for you, given the right advice at the right time, settlement agreements should take into consideration individual circumstances.

We have been giving clear and effective advice on settlement agreements for over 25 years, with four Law Society of Scotland Accredited Specialists in employment law. If you need immediate advice on settlement agreements please contact our team today on 0131 270 7938.

What is a settlement agreement?

Settlement agreements are typically an agreement where you as the employee are paid a sum of money in exchange for signing away claims against your employer. How much you receive as part of a settlement agreement can depend on a number of factors.

Such agreements are voluntary and can be offered at any time during the employment relationship or afterwards. Both parties may view a settlement agreement as a way of making a ‘clean break’ from the employment relationship, but they can also be used as a means of resolving an ongoing dispute in the workplace with an employee who remains employed.

A settlement agreement is one of the few means to legally prevent an employee or worker from pursuing certain statutory claims against an employer such as unfair dismissal and discrimination. Most other attempts to waive such claims even by written agreement are not enforceable.

How much am I likely to be paid for signing a settlement agreement?

Any agreed pay out for signing a settlement agreement will depend on a number of factors including:

  • whether you have a valid claim
  • the reason for you leaving, your employment ending or going to end
  • whether you have done anything wrong
  • how averse to risk you are
  • what your own circumstances are and what’s happened in your employment
  • what your contract says
  • how parties approach negotiation

How much you get varies tremendously. On the one hand, you might have to pay back your employer or get no money at all, for instance, if you have acted terribly and are concerned about your reputation and your employer suing you. While on the other hand, you might be offered millions of pounds. It’s more often though somewhere in the middle.

There are settlement agreement calculators on offer out there, however it’s normally not as cut and dried as that. Generally speaking though, if you’re being made redundant, and you have about two or more years’ service, you are entitled to a statutory minimum redundancy payment. You can calculate this on the Government’s statutory redundancy calculator here. The exact figure you are entitled to will depend on what the contractual position is, your length of service, your age and weekly gross pay. But there are many more reasons than just redundancy for a settlement agreement.

A first step would be to consider if a settlement agreement is right for your circumstances and seek advice from a qualified solicitor. Finding out more about settlement agreements will make you more informed and able to negotiate the right outcome for your circumstances, or to instruct your solicitor to do that for you.

What are your statutory rights?

In the context of employment, you as an employee have a number of rights that are created through legislation.

The main ones include the right:

  • not to be unfairly dismissed
  • to be given holidays and paid holiday pay
  • to a maximum working week
  • to not to be discriminated against or harassed
  • to be paid sick pay
  • to protection as a whistleblower

Claims for breach of these statutory rights can be waived through a settlement agreement. Attempts to settle these claims that do not meet the relevant requirements for a settlement agreement may not be binding.

Why is a solicitor needed for a settlement agreement?

If presented with a settlement agreement, it is important for you as an employee to have a clear and thorough understanding of what you are agreeing to and also the effect which entering into the agreement will have on your future rights. However, you may understand the effect of the settlement agreement and feel there is no need to see a solicitor. Nonetheless, it is a legal requirement that an employee receives advice from a relevant independent adviser. If you have not received advice, then the agreement is not valid or binding – and you could still pursue claims for unfair dismissal, discrimination, and holiday pay for example.

What is required for a settlement agreement?

There are certain requirements that must be met for a settlement agreement to be legally binding:

  • it must be in writing
  • it must relate to a particular complaint(s) or proceedings
  • it must be signed by you as the employee
  • you must have received independent legal advice from a relevant independent adviser such as a solicitor or a certified adviser
  • the adviser must be identified in the agreement
  • the adviser must be insured in order to cover the risk of a claim from the employee in respect of any loss arising from the advice given
  • the agreement must record that the requirements regulating the settlement agreement have been satisfied
  • it is important to note that a ‘one size fits all’ agreement that is not tailored to the individual circumstances may not be binding upon the employee.

How much will it cost you to enter into a settlement agreement?

The cost will vary from case-to-case.

Most employers will pay a contribution towards the cost of the legal advice (usually between £250 + VAT and £1,000 + VAT) provided that the settlement agreement is signed by the employee. Depending on how much advice is required, it may be that a contribution is sufficient to cover the legal costs.

The cost of defending a claim to the Employment Tribunal can be more expensive than coming to an agreement and therefore when appropriate, a settlement agreement can sometimes be a cost-effective tool. Equally, the cost of pursuing a claim and the potential awards can be outweighed by the settlement on offer from the employer, making it uneconomical to bring a claim.

How will a settlement agreement affect me in the future?

It is a legally binding agreement that can be relied upon to prevent you from bringing subsequent claims that are expressly waived under the settlement agreement. A properly drafted and signed settlement agreement gives your employer the certainty of knowing that claims have been waived. However, it also enables a claim to be brought by the employer if the terms are not honoured.

Once validly signed, generally speaking, neither party can change their mind without the other party’s agreement.

From an employee’s perspective, the settlement agreement can normally be relied on to enforce a payment or right under the agreement against an employer.

Can I request a settlement agreement?

Yes. In the right circumstances, a settlement agreement can be a clean, cost effective, and amicable way of ending the employment relationship (or resolving a particular dispute while remaining an employee). The process of entering into settlement discussions can be instigated by you. It is up to your employer whether they wishes to agree to the terms offered and/or make a counter offer.

In certain cases, where the Advisory, Conciliation and Arbitration Service (known as Acas) is involved, a written agreement called a COT3 Form may be used and that can provide a more straight forward method of settling certain claims.

How do the negotiations work?

Negotiations can be carried out in a number of different ways to fit the scenario including:

  • meetings/correspondence between you and your manager
  • telephone conversation/correspondence between your solicitor and your employer or their solicitor
  • mediation through a trained professional mediator
  • Judicial Mediation through an Employment Tribunal judge
  • correspondence via Acas

However, whichever method is used, it may be important to ensure that negotiations are carried out on three points:

  • Without prejudice
  • Protected basis
  • Subject to contract

What can settlement agreements include?

Settlement agreements can deal with a wide range of issues; they don’t need to be restricted to waiving the statutory employment related claims (like unfair dismissal, discrimination, and holiday pay) in exchange for money. The following can also be dealt with:

  • entitlement to shares
  • income protection, private health insurance, and other benefits
  • company property like cars, computers, and intellectual property
  • references and announcements to staff
  • restrictions on:
    1. working for competitors
    2. enticing clients and employees away
    3. on what information can be disclosed to third parties, and
    4. making certain unfavourable or critical comments about the parties
  • certain claims for personal injury
  • certain rights in connection with occupational pensions

Is the money paid under a settlement agreement tax free?

How much tax you pay on a settlement agreement sum will depend on a number of factors dependent on the relevant tax rules at the time.

Generally, payments due under the contract of employment like holiday pay and notice pay will be subject to income tax and national insurance contributions, but there are exceptions.

If payment is made as compensation for losing employment and in other restricted circumstances, you may be entitled to receive £30,000 without deductions for tax. In unusual situations, you may be able to receive more.

There is often a clause in the settlement agreement which requires you to indemnify your employer in relation to any additional tax it might be asked to pay. Whether this tax indemnity is included in the final agreement may depend on each party’s leverage in the negotiations.

How do you know if the settlement agreement is a good deal?

The decision to enter into a settlement agreement is a matter for each party. It is not the solicitor’s decision, but we can give advice on the offer, what options each party has available, and discuss a strategy. Even if the solicitor considers that it is not a good deal, you are still entitled to sign the agreement.

Normally an employee is incentivised to sign a settlement agreement by being given a payment or other benefits (such as a positive reference) as part of the agreement. If an employee is not receiving any more than they are already legally entitled to in any event, there is normally little or no reason for them to sign the settlement agreement. However, whether it is worthwhile for the employee to sign will very much depend on the circumstances.

How long do you have to consider the terms of a settlement agreement?

There is no set period. Acas recommends that employees are given a minimum of 10 days to consider the proposed conditions of the agreement, but ultimately it depends on the circumstances and the parties’ bargaining positions.

How much is statutory redundancy pay?

Statutory redundancy is calculated using a formula which is based on length of service, age, and weekly pay. There is a helpful calculator on the Government website.

What happens if I decide not to sign a settlement agreement?

If the settlement agreement is not signed and if a signature is a condition on the agreement being valid and binding then you are free to pursue a claim against your employer and, in certain circumstances, your colleagues.

If your employment continues, your employer may decide to terminate your contract using an alternative method to a settlement agreement and you could end up with nothing.

Can a Scottish solicitor sign an English settlement agreement?

The bulk of employment law is UK wide. There are a few contractual wrinkles with which we are familiar; we have considerable experience of acting for employers and employees based south of the border. There is no legal reason why a solicitor qualified in Scotland cannot sign off a settlement agreement governed by English law or one that relates to an employer who is based in England.

What if a settlement agreement is not honoured?

If a settlement agreement is not adhered to in any way, such as failure from an employer to pay the employee or failure by either party to abide by a confidentiality clause, then a claim for a breach of contract can be raised. The person suing will usually receive damages in the sum of money where there is a breach, but in some circumstances, they can compel the other party to carry out their obligations under the agreement or prevent them from further breaching the terms.  If one party breaches the terms then the other party may be freed from having to comply with their side of the agreement.


A settlement agreement, on the right terms, can be an effective means to bring an employment relationship to an end amicably with limited conflict. Alternatively, it can be used to resolve an existing dispute even where employment continues or settle potential claims after employment ends. Where an employee does not seek advice, there are certain claims that the employee will still be entitled to pursue because they will not have been validly waived.

Employment Tribunals can be costly and the outcome can be unpredictable. A settlement agreement may offer a more straightforward, cost-effective and speedy solution.

How can Anderson Strathern help?

We’re here to help support you through challenging times with our free employment law clinic. Contact Jemma Forrest or Mandy Armstrong and choose from a 20-minute Zoom/Teams call or a telephone call for an initial consultation at no cost. From advice on redundancy to flexible furlough, homeworking to contractual changes, we’re here to help.

We regularly assist individuals and businesses at an early stage to avoid settlement discussions becoming necessary. However, often settlement discussions are in in the parties’ best interests.

We advise on potential claims, settlement agreements and settlement discussions on a daily basis. Whether you are an owner/manager of an organisation, an HR professional, an in-house solicitor or an employee, we have the expertise and years of experience to help you. Taking advice from specialist solicitors who regularly appear before Employment Tribunal judges, really helps to keep you on the right track. There are also other related services we can provide, including providing settlement agreements, onsite HR support, negotiation and mediation and advising on immigration, court disputes, tax and wealth planning.

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