What is a Settlement Agreement: 25 things you need to know

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Your Settlement Agreement

Last Updated: 28th April 2021

25 valuable tips: The essential guide to your Settlement Agreement and getting the right deal.

Have you been asked to take part in a protected discussion, or been offered a settlement agreement by your employer?

If so, this essential guide covers everything you need to know to make informed choices and get the deal that’s right for you.

Your Settlement Agreement

This information will help you understand what a settlement agreement is, why your employer might offer it, whether you should sign, the standard clauses you should expect to see, some common pitfalls and how to avoid them.

It will also advise you what to do if an agreement can’t be reached with your employer, and what to do in the event of your agreement terms being breached.

What is a protected discussion?

A protected discussion is a conversation that you have with your employer, normally about bringing your employment to an end.

The most important thing to keep in mind is that nothing discussed during a protected discussion can be referred to in any future legal proceedings. So, you must treat the discussion/meeting as confidential.

In other words, such discussions offer a way for your employer to tell you ‘off the record’ that they want you to leave, without any repercussions for them.

Before having a protected discussion with you, your employer must make it clear (preferably in writing) that the discussion is protected. 

Once the discussion is underway, your employer will probably outline the reasons that they want to bring your employment to an end (for example they are unhappy with your performance, or they have decided to restructure) and then they will normally tell you how much they are proposing to pay you, as a settlement payment. 

You will then normally be given some time (10 days is recommended by ACAS) to think about their offer, and if acceptable to you, sign a document called a settlement agreement. 

THE LAW: Protected Discussions are governed by s.111A of the Employment Rights Act 1996

What’s the difference between a ‘protected discussion’ and ‘without prejudice’?

Whilst both offer the opportunity for an ‘off the record’ conversation, a protected discussion will take place when there is no existing dispute between you and your employer. Where a dispute already exists, a without prejudice conversation would be held.

Tom’s Tip

Protected discussions tend to be used in fairly straightforward situations relating to your exit from employment.

If your employer asks you to participate in a ‘without prejudice’ conversation, you are advised to speak with a lawyer as these are more commonly used by employers in disputes that may relate to discriminatory behaviour or whistleblowing claims.

What is a settlement agreement?

A settlement agreement is the written agreement between you and your employer which sets out the terms upon which your employment is brought to an end, by mutual consent. 

Most importantly, by accepting the terms of the agreement, you are fully and finally settling all legal claims which you may have against your employer. In return, your employer normally agrees to pay you some money (and other benefits such as a reference) as compensation for you losing your job. 

Settlement agreements are most commonly used to bring your employment to an end, but occasionally, they can be used to settle disputes between you and your employer without your employment contract being terminated. 
THE LAW: Unless resolved by pursuing an action at Employment Tribunal, employment disputes can be settled only by:

1) settlement agreements


2) by COT3 agreements drawn up by ACAS

Compromise or settlement agreement?

Until fairly recently, these types of agreements used to be called ‘compromise agreements’. However, in July 2013 the law was updated and ‘settlement agreements’ were introduced.

Whilst this was largely a relabelling exercise, you should be aware that there was one quite important change. Previously, your employer could only approach you with a compromise agreement if there was a live dispute between you. However since 2013, your employer can ask you to consider a this type of agreement even if there is no ongoing issue to be resolved.

Are there any other names for such an agreement?

Whilst the correct legal term is ‘settlement agreement’ your employer may also refer to such an arrangement in a number of ways, including:

  • Termination agreement
  • Ex-gratia payment
  • Golden goodbye
  • Gagging clause
  • Mutually-agreed resignation
  • Compromise agreement

Why would my employer offer one?

If you are asking “why have I been offered a settlement agreement?”, there are a number of reasons this could be the case.
Maybe your employer is unhappy with your performance, there may be a restructure and your role might be at risk of redundancy, a colleague of yours may have made a complaint about your conduct, you could be suffering from long-term illness and can’t return to work, or perhaps you have been discriminated against.

Alternatively, your employer may simply want to settle a claim you are pursuing at Employment Tribunal to avoid the cost and time of defending it.
It is important for you to note, being offered a settlement agreement doesn’t always suggest fault or wrongdoing on your part.

Sometimes, relationships at work just don’t work out and this is a less stressful way of bringing your employment to an end, without investigations or drawn out consultations.

And, if the price is right, it may prove to be the best option for you!

What are the main benefits of reaching an agreement?

If you have been offered a settlement agreement, you will want to know the potential benefits of accepting it.

Most notably, by reaching an agreement by mutual consent you can avoid the uncertain outcome, time and stress of an Employment Tribunal hearing. This will bring closure to a dispute with your employer in the quickest possible timeframe.

By allowing for a ‘clean break’ between yourself and your employer, both parties are afforded the certainty of knowing that the matter is resolved; you have the security of a financial settlement, work reference and ability to find alternative employment, whilst your employer/former employer knows that they will not have to face a claim by you in the future.

Settlement agreements are by their nature negotiations, so it is likely that the compensation you receive is going to be better than any statutory minimum that may be due to you.

In the case where your employment may not need to be brought to an end, internal disputes with your employer can also be concluded with the minimum of upheaval and unpleasantness.

Each situation is different, so an agreement that proves beneficial to someone else may not suit your individual circumstances. Each case needs to be assessed on its merits, so speaking with an employment solicitor can really help.

Do you have to accept it?

You can decide whether or not to accept an agreement.

As such, the simple answer as to whether you have to sign it is, no.

However, if your reject an agreement put forward by your employer, it is possible that you will be dismissed anyway; losing any benefits of accepting it.

How long do you have to make up your mind?

When you are offered a settlement agreement your employer should allow you reasonable time to consider it and consult with your chosen legal advisor.

ACAS recommend that your employer gives you a period of 10 days to take advice.

What happens if I refuse to sign?

If you choose not to sign your settlement agreement your employer will then decide whether to continue with your employment or not.

If, for example, your employer had offered it to you because they were unhappy with your performance at work, they could then choose to commence a performance improvement plan (PIP) against you.

Alternatively, your employer could ask you to participate in mediation to resolve matters.

If the agreement had been offered to you because of a company restructure, declining to sign it could result in your employer commencing a redundancy process.

Of course, if you don’t sign, and are subsequently dismissed, you may still be able to bring a claim against them at the Employment Tribunal (subject to your length of service).

How to negotiate a settlement agreement

Agreements are by their nature a negotiation.

As such, if you believe you are in a strong position and have good leverage, you can make a counter offer.

When we are brought in to review terms ahead of signing, our solicitors will always look to improve on what has been offered and negotiate better settlement outcomes for our clients.

So, if you want to know if a better deal can be negotiated, please get in touch.

Alternatively, if you feel you may be better off moving forward with a claim at Employment Tribunal we may be able to help you on a no win no fee basis.

If you have a reasonable legal claim against your employer you may be in a position to strike a better settlement deal. For example, if you have a strong unfair dismissal case against them, then you should be in a strong bargaining position.

However, if for example, your employer has offered you a settlement agreement as a short cut to avoid a redundancy process (but you accept your role is probably genuinely redundant) you will be in a weaker bargaining position.

Tom’s Tip

If your employer has asked you to consider a settlement agreement it is an indication that they want you to leave quietly.

This in itself is something your employer may be willing to pay more to achieve.

Do you need a solicitor?

In a word, yes.

In order for a settlement agreement to become legally binding, you will need to take advice on the wording of the contract from an employment solicitor.

To ensure you fully understand the implications of signing your rights away, it is essential that you are able to obtain legal advice.

Prior to signing, your solicitor will also give you an indication as to whether you are receiving the correct level of compensation based on length of service, salary and other contributing factors.

The good news is that your employer is responsible for meeting your legal costs!

It is after all your employer who is asking you to sign the agreement, so it is only right that they meet your costs of taking this ‘mandatory’ legal advice.

Can you request a settlement agreement?

Many people ask this question and the answer is, yes you can!

Admittedly, it is usually your employer who will suggest it, but there is nothing preventing you from asking them to engage in a ‘protected discussion’ instigated by you.

In fact, very often, if an employment relationship is going sour, your employer may be be relieved to hear that you would be willing to discuss exit terms.

What common clauses should you expect to see?

Settlement agreements tend to be quite similar in their format BUT the devil is in the detail!

To help you, outlined below are some of the common clauses found within most agreements so you can get an idea of what they are designed to achieve.

Full and Final Settlement:

The most important clause! By accepting the agreement you will be settling and / or waiving of All Legal Claims you may have against your employer/former employer, its associated companies, employees, directors or shareholders.

The settlement/waiver will apply to any legal claims which you may have knowledge of at the time of signing, or which may arise in the future (that you don’t yet know about!)

It will normally apply to any possible personal injury claim which you may have against them for any physical or psychiatric/mental injury.

The settlement/waiver will apply to legal claims you may have in the UK or abroad. It will apply to any claims you could bring in the Employment Tribunal and also to claims you could bring in the High Court or County Court.

It will normally go on to list all of the various claims which you could potentially bring against your employer, which, by entering into the agreement, you specifically agree to waive and / or settle.

How much money and when you will be paid:

Your agreement will set out details as to what settlement payment you will be receiving, and when you will be paid.

Tax Indemnity:

Your agreement will set out that the responsibility for paying any additional tax on the payment you receive is with you and not your employer/former employer.

Company Property/Information:

The agreement will normally specify that you are required to return all company property to your employer/former employer either on, or before the termination date.

The definition of ‘company property’ is normally fairly comprehensive. It includes company cars, mobile phones, laptops, ID badges, security passes, keys and all company documents (including copies).

You may also be required to irretrievably delete any, and all, company information you may hold on electronic devices being retained by you. Similarly, you may also be obliged to provide your employer with details of any passwords relevant to your employment.


It may contain a specific written reference which your employer proposes to forward to prospective employers on request.

It is not uncommon for employers to reserve their right to alter this reference should any information come to their attention which alters their willingness to provide the agreed reference.


In agreeing to pay you the compensation set out within the agreement, your employer will want you to give on certain warranties (promises). Some warranties that are commonly required by employers, include that:

  • You have not received any alternative employment as of the date of signing the agreement. And/or you have no expectation of receiving any offer of paid work/employment.
  • There are no circumstances of which you are aware that would amount to a repudiatory (very serious) breach of contract. Such circumstances that could have entitled them to terminate your employment contract without notice, i.e nothing that might have amounted to gross misconduct.
  • After termination, you will not hold yourself out as being in any way connected with them.
  • Any grievances, appeals or subject access requests previously made by you are withdrawn and you will not pursue any further ones against them.
  • You have not already issues any form of legal proceeding against them. That you will not do so in the future and in the event that you do so, any monies paid to you under the settlement agreement will be repayable to them as a debt.
  • You are not specifically aware of any possible personal injury claim which you have against them.

Judicial Proceedings:

It is very common for your employer/former employer to ask you to agree to make yourself available to participate in any future judicial dealings should they need to call upon you. For example, they may require you to act as a witness for them.


In addition to indemnifying your employer/former employer against any tax demanded by HMRC, you may be required to indemnify them in respect of any damages and / or legal costs incurred by them in defence of any legal proceedings instigated by you, or as a result of any breach you may make of the agreement.

No Further Payments or Benefits:

The agreement will probably require you to confirm that aside from the monies being due to you under the terms of the agreement, no further monies or benefits will be payable to you after the termination.

Confidential Information:

It is commonplace for you to be expected to confirm that under the terms of the agreement, you will continue to adhere to the confidentiality provisions set out in your employment contract after the termination date.

In addition to this, you will often be asked not to use, make copies of or disclose any possible confidential information you came into contact with during the course of your employment.

Finally, you should expect to be asked to agree to keep the existence of your settlement agreement totally confidential. This would include details of the negotiations leading up to it. In other words, you should not discuss it anyone other than your legal advisors, and immediate family.

Disparaging Comments:

Under the terms of your agreement you will be asked not to make any derogatory or disparaging comments which could harm the reputation of your employer/former employer, any of its employees, directors or shareholders.

Restrictive Covenants:

Any post-termination restrictive covenants that you are subject to will continue to bind you after your employment has come to an end. For example, you may be subject to a restrictive covenant that prevents you from working for a competitor for a period of time after your employment comes to an end. In this case, under the terms of your settlement agreement, this would remain enforceable.

Repayment: You should expect that if you commit any material breach of your obligations within the agreement, in particular any of the warranties, then you will be required to repay the settlement monies back to your employer as a debt.

Are there any clauses to be wary of?

The are a few clauses that you need to be wary of within a settlement agreement. They are common pitfalls that you should avoid.

Confirmation you have not been offered another job and, as at the date of signing your agreement, don’t expect to receive an offer of employment:

This is a clause that is quite easy to fall foul of. For example, if your former employer finds out that when you signed, you had already been to an interview and been offered a new job. In this situation you could be found in breach of the agreement and your former employer can therefore demand repayment of your settlement monies as a debt.

Retrospective clauses:

Occasionally a settlement agreement can contain these clauses. For example, you may have had to confirm that prior to signing you had not discussed it with anyone other than your immediate family.

We would recommend that you seek to have retrospective clauses removed.

Restrictive Covenants:

If you are subject to a restrictive covenant which may prevent you from working after your employment has come to an end, we would recommend negotiating your formal release from them.

Personal Injury Claims:

If you have an ongoing or potential personal injury claim against your employer, we would advise against signing an agreement, unless you specifically negotiate the right to continue or pursue such a claim.

How are terms decided in such an agreement?

The terms will be mutually agreed between yourself and your employer.

Any settlement agreement used should be customised to you and your individual circumstances. These agreed terms are then set out in the written documentation and must include a clearly expressed waiver of the specific claims which you as the employee has, or could feasibly have.

What are the key features to be aware of in settlement agreements?

Settlement agreements feature several key attributes that you need to be aware of:

  • It must be in writing
  • In most cases it will include some form of payment to you and possibly a reference
  • It is a legally binding contract. On acceptance of its terms you are unable to make any form of claim against your employer at Employment Tribunal or court
  • They are voluntary so you do not have to accept them. The agreement must be mutual.
  • It can be made at any time during your employment

How is an agreement reached?

In order for a settlement agreement to be reached, several things need to happen:

  1. It must be in writing
  2. The agreement must relate to the dispute or reason for proceeding
  3. You must be allowed to get legal advice on the terms and effect of the agreement
  4. Your legal advisor must be named in the agreement

Before your binding contract can be reached you should be given reasonable time to consider it and consult with your chosen legal advisor.

Your employer should allow you a minimum of 10 days (as recommended by ACAS) to take advice and they will meet your legal costs to do this.

Remember, you do not have to agree to a settlement agreement, or even enter into a protected discussion unless you want to, they are entirely voluntary.

What should your the agreement contain?

A settlement agreement usually contains several standard sections. These commonly include:

  • Outstanding salary, contractual bonuses/commissions, holiday, notice, gardening leave or in lieu of notice sum (contractual payments)
  • Ex-gracia / termination payment (compensatory payment)
  • Waiver of claims against your employer
  • Non disclosure / confidentiality clauses
  • Payment schedule

What happens once you have signed?

Once you have accepted your settlement agreement (by signing it and returning it to your employer) your employment will come to an end on the specified termination date.

At this point you should sit back and wait for your settlement agreement payment. You should normally expect to receive your payment within 14 days or the following payday.

If an agreement cannot be reached, what is likely to happen?

If a settlement agreement cannot be reached there are other options available to you and your employer.

Your employer may consider other methods to resolve your dispute, for example:

  • Commencing a Performance Improvement Plan (PIP)
  • Undertaking a disciplinary procedure
  • Suggesting you raise a grievance
  • Offering mediation

If however, these routes are pursued and your employer did not carry out the procedures correctly and you are subsequently dismissed, it may be possible for you to pursue a claim for unfair dismissal at Employment Tribunal.

Similarly, if you initially entered into a protected discussion due to a breach of your employment rights such as experiencing discrimination at work; where a settlement cannot be reached, you still have the option to move forward with an Employment Tribunal claim if you believe you have a strong case.

Do you have to end your employment after an agreement has been reached?

Whilst the majority of settlement agreements are used to enable a ‘clean break’, they can also be used to resolve employment disputes that do not result in the termination of your employment.

There are occasions where the employment relationship continues afterwards. For example, if you raised a grievance relating to a specific element of your employment. Where your employer may concede you have a valid point, but they wish this to remain confidential, they may offer you a settlement agreement to achieve this.

Ultimately, a settlement agreement is a negotiation that is arrived at by mutual agreement. On that basis they can be used in a variety of circumstances to bring a matter to a close without recourse to potential further legal action.

Seeking legal advice to clarify your situation is always advisable if you are unsure whether to consider a settlement agreement.

Is it better to go to Employment Tribunal or negotiate a settlement?

This will largely depend on the strength of your case!

You are not obliged to accept a settlement agreement. So, if you are not happy with the level of compensation and feel you have a strong case you could pursue a claim at Employment Tribunal.

However, it is really important to seek legal advice before taking this decision. Remember that you are not guaranteed a successful outcome at Employment Tribunal. There will always be risks attached and it can be a time consuming and stressful experience. You will have to weigh these factors when making your decision.

If you are unsure, contact one of our helpful team and we can advise you on your options.

Is a settlement agreement the same as redundancy?

Settlement agreements are often used in a redundancy situation but it is important to understand that they are not the same as redundancy, or your redundancy package.

An example of where they can be used in a redundancy situation is if your post is redundant and your employer offers one instead of going through a redundancy consultation process.

In this situation, you may not get additional redundancy pay which you could have been entitled to under your contract of employment, or by means of a statutory redundancy payment. However, in return for signing a settlement agreement, you could be paid in lieu of working your notice.

Your employer has breached your settlement agreement, what can you do?

Because your settlement agreement is a contract setting out the terms upon which your employment has come to an end, it supersedes all previous arrangements.

As such, if your employer has breached the terms of your settlement agreement your only option is to bring a claim against your employer for breach of contract.

Whether you bring this claim at Employment Tribunal or County Court depends on whether your employer’s breach of contract took place before or after your employment contract came to an end.

In any event, you cannot ask for your job back, or pursue a claim you may have had against them prior to signing the settlement agreement.

What is a COT3 settlement?

In short, a COT3 settlement is one that is achieved through the Advisory, Conciliation and Arbitration Service (ACAS).

If you have not been able to reach an agreement with your employer and you have decided to pursue a claim at Employment Tribunal, you will first have to go through the ACAS early conciliation process.

ACAS will appoint one of their conciliators to your case. They will make contact with your employer/former employer in an attempt to avoid a full Employment Tribunal hearing via what is referred to as a COT3 settlement.

Essentially a COT3 serves a similar purpose as a settlement agreement but it is administrated by ACAS so does not require separate legal oversight.

Again, you are not obliged to accept a COT3 settlement and can decline it in favour of a tribunal hearing. If you do so, ACAS will then provide you with a numbered certificate which you will need to fill out an ET1 form.

Strict time limits apply to advancing a claim at Employment Tribunal so be sure you are aware of them before considering your options.

Should you have a solicitor if going through the ACAS settlement process?

Unlike settlement agreements, it is not a legal requirement for a solicitor to advise on a COT3 settlement. ACAS will take care of all elements of the process.

However, it is always worth keeping in mind that ACAS is very much a neutral body. Every effort will be made by your ACAS conciliator to ensure there are no terms that could prove more favourable to your employer/former employer. A specialist employment solicitor involved in a settlement agreement outside of the ACAS process, will work specifically to represent your interests and only your interests.

What to do if you have been offered a settlement agreement?

If you have been offered a settlement agreement which you are happy with, call us right away on 020 3923 4777. You will need a solicitor to review and sign it on your behalf and this will be paid for by your employer. We may also be able to negotiate better terms on your behalf.

Alternatively, if you wish to reject an agreement and pursue a claim at Employment Tribunal our approachable and professional team are on hand to advise you on the potential merits of your case and its likelihood of success. You can contact us or submit your details 24/7 online via our quick & simple enquiry form.