What is a settlement agreement, and should I sign one?

The document that ends an employment relationship and the right to sue over it. The six conditions that make it binding, what a protected conversation is, and the tax rule that surprises people.

Difficulty: advanced
Time: 15 min
Read: 5 min
Safety: warning

Short answer

A settlement agreement is a contract in which you give up specified claims, usually in return for a payment. It is only valid if it is in writing, identifies the particular claims, and you have taken advice from an identified, insured independent adviser. You should be given a reasonable period to consider it — Acas says at least ten calendar days — and employers normally contribute to your legal fees. Not all of the payment is tax free.

Two things are worth understanding before the meeting rather than after. First, the law makes it hard to sign away employment claims by accident: the six conditions exist precisely so that nobody gives up a claim without independent advice. Second, a payment described as 'the tax-free thirty thousand' is often nothing of the sort, because the part representing notice pay is taxable in full.

Safety

A settlement agreement gives up your right to bring claims, usually for good. It is only binding if six statutory conditions are met, including independent legal advice from a named, insured adviser. Never sign one at the meeting where it is handed to you. Acas guidance says you should have at least ten calendar days to consider it, and employers almost always pay for the advice.

Step by step

Work out how the conversation is protected.Two mechanisms exist. 'Without prejudice' applies where there is already a dispute and covers all claims. The statutory protected conversation applies without any existing dispute, but only makes the discussion inadmissible in an ordinary unfair dismissal claim — not in a discrimination or whistleblowing claim.
Know when the protection falls away.The protected conversation does not apply where the dismissal would be automatically unfair, and where the employer's behaviour has been improper the tribunal can admit the conversation anyway. Acas gives undue pressure and discrimination as examples, including telling someone before any process that refusing means dismissal.
Check the six conditions.In writing; relating to the particular proceedings; you received advice from a relevant independent adviser on the terms and effect and on your ability to bring a tribunal claim; the adviser was covered by insurance or a professional indemnity; the adviser is identified in the agreement; and the agreement states the conditions are satisfied. Miss one and the waiver does not bind you.
Check who counts as an adviser.A qualified lawyer, a certified trade union officer or official, or a certified advice-centre worker. They cannot be acting for or employed by your employer, and on the advice-centre route they cannot charge you. Your employer contributing to your solicitor's fee is normal and does not disqualify them.
Read what claims you are giving up.The list is usually long and includes claims you do not know you have. Accrued pension rights and personal injury claims you are unaware of are commonly carved out; check that they are. Ask your adviser what is being waived that matters.
Work out the tax properly.The exemption for the first tranche of a termination payment applies only to genuine compensation for loss of employment. The part representing pay you would have had in a notice period is taxable in full under the post-employment notice pay rules, whether or not a payment in lieu is made. Ask for the calculation in writing.
Negotiate the reference and the announcement.An agreed reference wording annexed to the agreement is standard and worth asking for by name. So is agreed wording about what will be said internally. Both cost the employer nothing and matter to you for years.
Check the confidentiality clause against the law.A clause cannot stop you making a protected disclosure — any provision purporting to do so is void. Legislation to void confidentiality clauses covering harassment and discrimination allegations has been passed but is not yet in force, so check the current position with your adviser.
Check the restrictive covenants.Agreements often restate or extend post-termination restrictions. Ask whether you are being asked to accept new ones, and whether any payment is attributed to them, because that has its own tax treatment.
Take the time you are entitled to.Acas says a minimum of ten calendar days to consider a proposed agreement, and that you should be allowed to be accompanied at any meeting. Ask for it in writing if it is not offered.
Northern Ireland: the terminology and the rules differ.Northern Ireland uses compromise agreements under the Employment Rights (NI) Order 1996, with the same six conditions but a narrower definition of who can advise — a practising barrister or solicitor only. Crucially, Northern Ireland has no equivalent of the protected conversation, so an unsolicited exit conversation there is admissible in the industrial tribunal.

Tips

Ask for an agreed reference wording annexed to the agreement. It is the term people most regret not asking for.
Ask for the tax calculation in writing before you agree a figure, so you are negotiating on the net amount.
Ask whether the employer's legal fee contribution is fixed or negotiable. It usually is negotiable.

Common mistakes

Signing at the meeting — Every protection in the system assumes you take it away and get advice. Signing in the room removes all of them.
Assuming a protected conversation covers everything — It only makes the discussion inadmissible in an ordinary unfair dismissal claim. Discrimination and whistleblowing claims are not covered, and in Northern Ireland the protection does not exist at all.

If it doesn't work

You were told to sign by the end of the day

Cause: Time pressure, which Acas treats as a factor in improper behaviour — Fix: Ask in writing for the ten calendar days the Acas Code envisages. Undue pressure can cause a protected conversation to lose its protection, which is a point your adviser can make for you.

The payment is smaller than expected after tax

Cause: Post-employment notice pay taxed in full — Fix: Ask for the calculation in writing and have your adviser check it. The exemption applies only to genuine compensation, not to the notice element.

The agreement names no adviser

Cause: One of the six conditions is missing — Fix: It has to identify the adviser and state that the conditions are met. Without that, the waiver does not bind you — but do not rely on a technicality; get it corrected.

Questions people ask

Do I have to sign?

No. You can decline and continue in the job, or decline and let any process take its course. Declining is not misconduct and cannot lawfully be treated as such.

Who pays for the legal advice?

Employers almost always contribute a fixed sum, because the agreement is not binding without the advice. If the contribution does not cover your adviser's fee you can negotiate it, and many advisers work to the contribution for a straightforward review.

Is an Acas COT3 the same thing?

It is the other route to a binding settlement — an agreement recorded by an Acas conciliator — and it does not require independent legal advice. It is common where Acas is already involved through early conciliation.

Can I still claim afterwards if something new emerges?

Generally not for anything covered by the waiver, which is why the list matters. Claims that could not have been known about, and certain rights such as accrued pension, are usually excluded — check that they are in your agreement.

Will it affect benefits?

A termination payment can affect means-tested benefits and there may be questions about why the employment ended. Ask the adviser and check with the relevant benefit before signing.