What is a settlement agreement?

Written by: FILL OUT BEFORE GOING LIVE, Setfords Published: 23 June 2026 Last reviewed: 23 June 2026 Read time: 8 minutes

Settlement agreements explained:

A settlement agreement is a legally binding contract between you and your employer that ends your employment and waives your right to bring most tribunal claims. Here’s what it covers, what to look out for, and when to get legal advice.

Key takeaways

• A settlement agreement is a legally binding contract. Once signed, you give up the right to bring employment tribunal claims against your employer.
• You must receive independent legal advice before signing; your employer is usually required to contribute to the cost of that advice.
• The financial package, confidentiality terms, and what your employer will say in a reference are all negotiable.
• You are never obliged to sign. An offer is a starting point.
• If you have been dismissed or are facing redundancy, strict time limits apply to tribunal claims, so get advice quickly.

The short answer

A settlement agreement (previously called a “compromise agreement”) is a legally binding contract between you and your employer. By signing it, you agree to waive your right to bring most employment tribunal claims (unfair dismissal, discrimination, or unpaid wages) in exchange for a financial payment and, usually, an agreed reference.

Settlement agreements are used in a range of situations: redundancy, dismissal, the end of a performance improvement process, or simply a mutual decision to part ways. They are also sometimes offered “out of the blue” as part of a protected conversation, a formal mechanism that allows your employer to propose a settlement without that conversation being used as evidence if matters do end up at tribunal.

You have a right to take independent legal advice before signing, and your employer is normally required to contribute to the cost of that advice. Take the time you need.

What does a settlement agreement include?

A standard settlement agreement covers several key areas. Understanding each one before you sign matters.

The financial payment

This is usually the headline figure: a lump sum paid on or around your last day of employment. The payment typically covers:

• Any outstanding salary, holiday pay, and notice pay you are owed.
• A compensation payment for agreeing to waive your claims. The first £30,000 of this element is usually paid free of income tax under current HMRC rules, though tax treatment can vary depending on what is included. A solicitor can advise on your specific position.

Waiver of claims

This is the clause you need to read carefully. It lists the legal claims you are agreeing to give up. A broad waiver will cover unfair dismissal, wrongful dismissal, discrimination, unpaid wages, and more. Claims must be specifically identified to be waived. A general reference to “all claims” is not sufficient in law.

What is a waiver of claims? It is the part of the agreement that prevents you from taking your employer to an employment tribunal after signing. Once signed, you cannot go back. This is why independent legal advice is a legal requirement, not a formality.

Notice period

The agreement will set out whether you work your notice period or receive a payment in lieu of notice (PILON). A PILON is typically taxable income, so the amount matters.

Reference

Many settlement agreements include an agreed reference. This is worth negotiating carefully. A neutral, factual reference confirming your job title and dates of employment is standard, but you may be able to agree something more positive.

Confidentiality

Most agreements contain a confidentiality clause, sometimes called a non-disclosure agreement (NDA). This prevents you from discussing the terms of the agreement, and sometimes the circumstances of your departure, with anyone other than your solicitor, a close family member, or relevant authorities. The scope of this clause is negotiable.

Post-termination restrictions

Some agreements include restrictive covenants: clauses that limit where you can work, who you can contact, or what you can do after leaving. These should be reviewed carefully. Restrictions that are broader than necessary to protect a legitimate business interest may not be enforceable, but a solicitor can assess that for your specific situation.

How much should you receive?

There is no single standard figure. What you receive depends on several factors:

• How long you have worked for your employer.
• Your salary and benefits.
• The strength of any claims you might have. If your treatment raises questions of unfair dismissal or discrimination, that increases your negotiating position.
• Your employer’s appetite to resolve matters quickly and avoid tribunal proceedings.

To give you a sense of scale: the maximum compensatory award for unfair dismissal between 6 April 2026 and 31 December 2026 is the lower of 52 weeks’ gross pay or £123,543 (as set by the Employment Rights (Increase of Limits) Order 2026). It is also worth noting that under the Employment Rights Act 2025, this compensatory cap for unfair dismissal is scheduled to be removed entirely on 1 January 2027, meaning tribunals will be able to award the full value of lost earnings without an upper limit. These figures and changes give context to what a reasonable settlement might look like if you have a strong potential claim.

The Employment Rights Act 2025 is also worth knowing about. The qualifying period for unfair dismissal is being reduced from two years toward six months, which means more employees will have the right not to be unfairly dismissed. This strengthens the negotiating position of many people who would previously have had no claim.

What to check before you sign

Before you agree to anything, there are several points to go through with your solicitor.

Is the financial package right? The first offer is rarely the final one. Your employer needs you to sign; that gives you a stronger negotiating position than you might expect.

What does the waiver cover? Check that it doesn’t waive claims that arise after you sign, for example a personal injury that emerges later. Personal injury claims and pension rights are typically excluded.

What will your reference say? Get the agreed reference wording in writing as part of the agreement, not as a verbal assurance.

How long is the confidentiality clause? Clauses that are indefinite or unusually broad are sometimes negotiable, particularly where your role is relevant to your career.

Are the post-termination restrictions proportionate? If they would prevent you from practising your profession or working in your sector, that is worth pushing back on.

What is the payment date? This should be clearly stated. Delays after signing can be difficult to enforce without the agreement being specific.

Common mistakes to avoid

1. Signing too quickly. You have a right to reasonable time to consider the offer and take advice. There is no fixed minimum under law, but the ACAS Code of Practice on settlement agreements suggests a minimum of 10 calendar days. Do not let your employer pressure you into signing faster.
2. 
   Focusing only on the headline figure. The reference, the confidentiality clause, and any post-termination restrictions all have long-term value. A slightly lower payment with better reference wording can be worth more to your career.
3. 
   Not checking for outstanding sums. Outstanding commission, bonuses, or accrued holiday pay should all be included. Once you sign, it is extremely difficult to recover anything not captured in the agreement.
4. 
   Assuming the first offer is final. Employers typically expect some negotiation. An experienced employment solicitor will be able to advise on whether the offer reflects the strength of your position and what a reasonable counter-proposal looks like.
5. 
   Missing the tribunal time limit. You have three months less one day from the date of dismissal (or the act you want to complain about) to bring most employment tribunal claims. If settlement negotiations drag on and the deadline passes without resolution, you may lose the right to claim. Keep this date in mind throughout.

When to speak to a solicitor

You should speak to an employment solicitor as soon as you receive a settlement agreement, and before you respond to your employer in any substantive way.

A solicitor can help you:

• Assess whether the financial package reflects the strength of your position.
• Identify claims your employer may not have included in the waiver, which could be used to negotiate a better outcome.
• Review and negotiate the reference, confidentiality, and restriction clauses.
• Ensure the agreement is valid. A settlement agreement that doesn’t meet the legal requirements is unenforceable.
• Advise on the tax treatment of different elements of your payment.

Your employer is required to contribute to the cost of independent legal advice as part of making the agreement binding. The contribution they offer may not cover the full cost of a thorough review, particularly if negotiation is required, but it reduces the barrier to getting proper advice.

If this affects you, a solicitor can talk you through your options and what your agreement means in practice.

Speak to our employment team for a confidential, no-obligation conversation.

FAQs

Do I have to sign a settlement agreement?

No. You are never obliged to sign. If you do not sign, your employment continues or, if you have already been dismissed, you retain the right to bring tribunal claims. Whether that is the right choice depends on the strength of your position and what you are being offered. A solicitor can help you weigh that up.

Can I negotiate a settlement agreement?

Yes. The financial payment, the reference, the scope of confidentiality, and any post-termination restrictions are all negotiable. Most employers expect some negotiation. An employment solicitor can advise on what is reasonable in your situation and help you make the strongest case.

How long do I have to consider a settlement agreement?

There is no fixed legal minimum, but the ACAS Code of Practice suggests at least 10 calendar days. Your employer cannot legally force you to sign immediately. If you feel you are being pressured, that is something to raise with your solicitor.

Is my settlement payment taxable?

It depends on what the payment covers. Notice pay and holiday pay are always taxable. An element of the compensation payment for waiving your claims can usually be paid free of income tax up to £30,000, subject to HMRC’s complex rules on notice pay calculations. Above that, income tax and National Insurance contributions apply. Tax rules can change, so your solicitor can advise on your specific position.

What happens if my employer breaches the settlement agreement?

If your employer fails to pay the agreed sum, gives you a different reference to the one agreed, or breaches the confidentiality clause, you can pursue them through the civil courts. The agreement is a binding contract, and breach has consequences. Your solicitor can advise on the remedies available.

About the author

FILL OUT BEFORE GOING LIVE

Last reviewed: 23 June 2026.

Understand your options and your timeline. Talk to a Setfords solicitor when you’re ready.

This article is general information about settlement agreements in England and Wales and is not legal advice. The law and timescales can change, and every situation is different, so please speak to a qualified employment solicitor about your circumstances.