Settlement agreements, explained

A settlement agreement is a legally binding written contract between you and your employer, in which you agree not to bring specific legal claims, usually in return for a payment, and often an agreed reference and a leaving date. They used to be called compromise agreements. They are common when a job is ending, but can also settle a dispute while you stay, for example over a bonus. Signing one is voluntary.

Because you are giving up legal rights, the law sets strict conditions. The agreement must be in writing, relate to particular claims, and you must have had advice from a relevant independent adviser, who is insured and named in the agreement. Without that, it will not stop you bringing statutory claims in a tribunal. This page covers Great Britain; Northern Ireland has its own law.

The legal conditions

Under section 203 of the Employment Rights Act 1996, a settlement agreement only stops you bringing a statutory claim if:

1. it is in writing;
2. it relates to the particular proceedings or claims;
3. you have received advice from a relevant independent adviser on its terms and effect, in particular on your ability to bring claims in an employment tribunal;
4. the adviser has insurance or a professional indemnity in force covering your claim if the advice is wrong;
5. the agreement identifies the adviser;
6. the agreement states that these conditions have been met.

A relevant independent adviser can be a qualified lawyer, or a trade union officer, official, employee or member, or an advice centre worker, who has been certified in writing as competent and authorised to advise. Acas adds that the adviser must not be employed by or acting for your employer.

Acas also points out that the agreement must list the specific claims it covers: a bare statement that it is “in full and final settlement of all claims” would not be enough.

Protected conversations

Settlement talks are often called “protected conversations”. Two separate rules can stop what was said being used as evidence later.

	Without prejudice	Section 111A
Needs an existing dispute?	Yes	No
Claims covered	Any, including discrimination	Ordinary unfair and constructive dismissal only
Lost if	“Unambiguous impropriety”, such as blackmail, threats or discrimination	“Improper behaviour”, such as harassment, intimidation, discrimination or undue pressure

Acas gives examples of undue pressure: not allowing a reasonable time to consider the offer, saying before a disciplinary that you will be dismissed if you turn the offer down, or threatening to damage the organisation’s reputation. Setting out the reasons for an offer, or factually explaining that disciplinary action may follow if it is refused, is not improper in itself.

Section 111A does not cover automatically unfair dismissal claims, such as whistleblowing, or discrimination claims. Acas explains that being offered a settlement agreement cannot itself be used to claim constructive dismissal.

What is usually in a settlement agreement

Term	What to look for
Compensation payment	The amount, when it is paid, and how it is split for tax
Notice pay or PILON	Whether it is paid, and that it is taxed as earnings
Holiday pay	Payment for untaken holiday, usually taxed
Leaving date	The date employment ends, which affects notice and benefits
Claims waived	The specific claims listed, which the law requires the agreement to identify
Reference	An agreed wording; employers do not have to give one otherwise
Confidentiality	What you can and cannot say, and to whom
Legal fees	Any contribution to your adviser’s costs
Restrictive covenants	Any post-employment restrictions confirmed or added

Tax

Acas says you do not usually pay tax or National Insurance on the first combined £30,000 of compensation for giving up your right to make a tribunal claim and redundancy pay. Wages or salary, bonuses, commission, holiday pay and payment in lieu of notice are usually taxed. The agreement should show a breakdown of the payments and any deductions. Acas calls this a complex area and suggests a tax adviser or HMRC if you are unsure. As an illustration only: an agreement paying £5,000 of notice pay and £20,000 of compensation would normally see tax deducted from the £5,000 but not usually from the £20,000.

Acas also notes that the reason your employment ends can affect benefits such as Universal Credit or Jobseeker’s Allowance, and payments under some insurance policies, so check how the agreement describes it.

Confidentiality

Confidentiality clauses, also called non-disclosure agreements, are common and voluntary. They usually allow you to tell close family and professional advisers. But:

• a term is void so far as it tries to stop a worker making a protected disclosure (whistleblowing), and since 6 April 2026 that can include sexual harassment;
• Acas says a confidentiality clause cannot stop you reporting a crime to the police, or, in England and Wales, sharing information about a crime to get support as a victim;
• the Employment Rights Act 2025 will make terms void so far as they stop workers making allegations or disclosures about harassment or discrimination, and the government’s timeline lists the regulations on misuse of NDAs for 2027.

See whistleblowing.

Time to think, and negotiation

Acas says employers should give a reasonable time to consider the written offer and get advice, and its Code of Practice on settlement agreements recommends at least 10 days. You can negotiate and make a counter offer. There is no legal right to be accompanied at a settlement meeting, but Acas calls it good practice to allow a colleague or union representative.

Many offers are made alongside a redundancy or a performance or disciplinary process. Acas says that if you take voluntary redundancy under a settlement agreement, it still counts as a redundancy. See redundancy.

Settlement agreement or COT3?

If you settle through Acas conciliation, the agreement is recorded in a COT3 rather than a settlement agreement. The section 203 conditions above, including independent advice, are a separate route that does not apply to agreements reached through an Acas conciliator. Both are binding. See Acas early conciliation.

If you turn it down, or it is broken

If you say no, your employment continues and any underlying process, such as a disciplinary, may carry on. If you have a claim, the tribunal time limits still apply: six months for most events on or after 1 October 2026, three months for earlier ones. See employment tribunal.

If either side breaks a signed agreement, Acas says it is a breach of contract, which can be taken to the county court in England and Wales or the sheriff court in Scotland.

What to check in your contract or letter

• The list of claims waived, and whether it matches the claims you might have.
• The payment schedule and tax breakdown: compensation, notice pay, holiday pay, bonus, and when each is paid.
• The termination date, notice and any garden leave.
• PILON clause in your employment contract, and how the agreement treats notice pay.
• Enhanced redundancy or bonus scheme terms you may be giving up.
• Pension, share options and benefits, and what happens to them.
• Agreed reference wording, and whether verbal references must match it.
• Confidentiality and non-derogatory statement clauses, and the exceptions.
• Restrictive covenants carried over from your contract.
• Repayment or clawback clauses if you breach the agreement.
• The adviser clause and legal fees contribution.

When it helps to speak to a solicitor

For a settlement agreement, independent advice is not optional: the law requires it. A solicitor will explain the terms and their effect, check whether the payment reflects the claims you are giving up, and can often negotiate the money, the reference and the wording. It helps to share the full background, not just the draft, so the advice covers everything you might be waiving. EmployedRight’s free document check can help you find the clauses above first.

Common questions

Do I have to get legal advice before signing a settlement agreement?

Yes. For a settlement agreement to stop you bringing statutory employment claims, you must have received advice from a relevant independent adviser on its terms and effect, in particular on your ability to bring tribunal claims. The adviser must be insured, and the agreement must name them. A relevant adviser can be a qualified lawyer, or a certified and authorised trade union official or advice centre worker.

Who pays for the legal advice on a settlement agreement?

There is no legal requirement for your employer to pay, but Acas says employers should consider offering to pay for the independent advice, because it helps make sure the worker gets the advice they need. Many agreements include a contribution towards your adviser's fees. If the contribution does not cover the advice you need, that is something you can raise in negotiation.

How long do I get to consider a settlement agreement?

Acas says employers should give a reasonable amount of time to consider the written offer and get independent advice, and its Code of Practice on settlement agreements recommends at least 10 days. Disabled workers may need longer as a reasonable adjustment. Being rushed can matter: not allowing reasonable time can count as improper behaviour, which can make the discussions usable as evidence.

Is a settlement agreement payment tax-free?

Partly, sometimes. Acas says you do not usually pay tax or National Insurance on the first combined £30,000 of compensation for giving up your right to claim and redundancy pay. Wages, bonuses, commission, holiday pay and payment in lieu of notice are usually taxed. The agreement should show a breakdown of the payments and any deductions. Acas suggests a tax adviser or HMRC if you are unsure.

Can a settlement agreement stop me whistleblowing?

No. A term in any agreement between a worker and employer is void so far as it tries to stop you making a protected disclosure, and Acas says confidentiality clauses also cannot stop you reporting a crime to the police. Since 6 April 2026, disclosures about sexual harassment can be protected disclosures. Wider rules on non-disclosure agreements in harassment and discrimination cases are planned for 2027.

What if my employer does not pay what the settlement agreement says?

Acas says breaking the terms of a settlement agreement is a breach of contract, whether it is the employer failing to pay or the worker breaching confidentiality. You can claim in the county court in England and Wales or the sheriff court in Scotland. The agreement should say when and how payments will be made, so check those dates.

Sources

1. Acas: Settlement agreements checked Fri Oct 02
2. Acas: Discussing and negotiating a settlement agreement checked Fri Oct 02
3. Acas: Making a formal settlement offer checked Fri Oct 02
4. Acas: Settlement agreements, confidentiality checked Fri Oct 02
5. Employment Rights Act 1996, section 203 (restrictions on contracting out; settlement agreement conditions) checked Fri Oct 02
6. Employment Rights Act 1996, section 111A (confidentiality of pre-termination negotiations) checked Fri Oct 02
7. Employment Rights Act 1996, section 43J (confidentiality clauses and protected disclosures) checked Fri Oct 02
8. Employment Rights Act 2025, section 24 (contractual duties of confidentiality relating to harassment and discrimination) checked Fri Oct 02
9. GOV.UK: Plan to Make Work Pay and Employment Rights Act timeline update checked Fri Oct 02
10. GOV.UK: Whistleblowing for employees (confidentiality or gagging clauses) checked Fri Oct 02
11. GOV.UK: Redundancy, your rights (tax on termination payments) checked Fri Oct 02
12. Acas: How early conciliation works (COT3) checked Fri Oct 02
13. Acas: Constructive dismissal checked Fri Oct 02
14. Employment Rights Act 2025 (Commencement No. 5 and Transitional Provisions) (Amendment) Regulations 2026, SI 2026/954 checked Fri Oct 02

This guide is general information about employment law in Great Britain (England, Wales and Scotland). Northern Ireland has its own employment law. It isn't legal advice and doesn't take your circumstances into account.