Settlement agreement

A settlement agreement (previously known as a compromise agreement) is a formal agreement entered into by an employee and employer. Generally, the employer pays the employee in exchange for the employee’s agreement not to pursue his or her legal rights through a tribunal or court. Settlement agreements often bring an end to the employment relationship.

Employees need to take advice on the terms of the settlement agreement and the effect it will have on their ability to pursue their rights through a tribunal or court. The adviser must be identified in the agreement and must have professional indemnity insurance.

When dealing with settlement agreements, we will:

  • Obtain a copy of the settlement agreement from your employer
  • Advise you about your legal entitlements and how the settlement package you have been offered can be improved
  • Negotiate the terms of your settlement package
  • Finalise the agreement

Valid Settlement agreements

A settlement agreement will only be legally binding if these requirements are met:

  • It is in writing
  • It relates to a “particular complaint” or “particular proceedings”
  • The employee or worker received legal advice from an independent adviser on the terms and effect of the proposed agreement and its effect on their ability to pursue the statutory rights in question before an Employment Tribunal
  • The independent adviser has a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee in relation to the advice
  • The agreement identifies the adviser
  • The agreement states that the conditions regulating settlement agreements have been satisfied

At Lyons Davidson, we will give you the independent legal advice you need for a valid settlement agreement and ensure that all the above requirements are satisfied.

Standard settlement agreements

As long as the statutory requirements have been met, the terms of a settlement agreement are entirely up to the parties involved. Some of the common terms found in settlement agreements are outlined below:

  • Termination date: The settlement agreement states the date that the employment relationship comes to an end
  • Termination payment: This gives a breakdown of the settlement package, including when and how the settlement sum will be paid. The first £30,000 may be exempt from tax; however, this depends on how the sum is broken down. Anything over £30,000 is subject to income tax in the normal way. If HMRC argues that the £30,000 tax exemption does not apply, it will usually pursue the employer for the tax owed. Employers therefore include a clause ensuring that they can recover any tax paid, after paying the amount tax-free to the employee
  • Pensions and benefits: This sets out conditions relating to the employee’s pension and any benefits they are entitled to under the contract, such as using a company car until the employment relationship has ended (if this is after the date of the settlement agreement)
  • Waiver of claims: This sets out all the claims the employee may have against the employer and that are being compromised. Some statutory claims cannot be settled through a settlement agreement, such as the right to statutory maternity or paternity pay, and claims for failure to inform and consult employee representatives about collective redundancies
  • Employee warranty: It is common practice for warranties from the employee to be included in a settlement agreement. These usually cover returning the employer’s property, confidential information and documents relating to its business, and confirmation that the employee has not received an offer of employment before entering the settlement agreement (since this may affect the amount of compensation the employer is willing to pay). Employees are also often required to warrant that they have not committed any breaches of their contract of employment, which would have entitled the employer to terminate their employment without any notice or payment in place of notice
  • Confidentiality: This sets out obligations relating to confidentiality and other restrictions. It may be limited to keeping the terms of the settlement agreement confidential, although sometimes employees are also required to keep the existence of the agreement itself confidential. The settlement agreement should also identify any terms in the employment contract that are intended to last longer than termination, such as post-termination restrictions and agreements by each party not to make any derogatory comments about the other
  • Legal fees: Employers usually make contributions to employees’ legal fees, because one of the requirements of a valid settlement agreement is that the employee has taken independent legal advice on its terms and effect. The settlement agreement confirms that the employee received independent legal advice and states the contribution made by the employer
  • Entire agreement clause: This clause means that neither party can argue that anything said in negotiations or any other documents forms a term of the contract. Any obligations included in the employment contract will not have an effect unless they are specifically included the settlement agreement
  • Governing law and jurisdiction: This states which country’s courts have jurisdiction to hear any disputes arising from the contract
  • Without prejudice and subject to contract: The settlement agreement remains ‘without prejudice’ until the parties have signed it. This means that statements made by either party in a genuine attempt to settle a dispute, whether these were in writing or conversation, cannot be used in tribunals or court as evidence, if the parties are unable to settle the dispute.


  • Adviser’s certificate: A certificate signed by the adviser to confirm they are independent adviser and that the necessary advice has been given to the employee
  • Agreed reference: Employers do not have a legal obligation to give references for employees. However, sometimes employers and employees agree that the employer will provide a reference if they receive requests for one. If a reference is agreed, it should be included as a schedule to the settlement agreement and a term about it should be included in the agreement itself.

At Lyons Davidson, we will explain the terms your employer includes in a settlement agreement and advise you about their effect. We will advise you how the settlement package offered can be improved and negotiate the terms with your employer. We will make any amendments agreed and finalise the agreement for you.