What a settlement agreement is
It's a written contract between you and your employer that ends a dispute, or a possible one. In return for money or other terms, you give up the right to take the claims it names to an employment tribunal or court. You used to hear them called compromise agreements.
You don't have to sign one. If you don't, your normal rights carry on, including statutory redundancy pay, notice pay and holiday pay.
When it's legally valid
For a settlement agreement to stop you making a statutory claim, the law sets conditions. It must:
- be in writing;
- relate to particular complaints or proceedings;
- say that you've had advice from a relevant independent adviser, usually a solicitor, on its terms and effect, and name them;
- say the adviser has professional insurance;
- state that these conditions have been met.
Employers very often pay a contribution towards your legal advice. Ask what they'll pay, and check the agreement says so.
What's usually in one
- your leaving date and how your notice is dealt with (worked, or paid instead);
- money: notice pay, holiday pay, redundancy pay and any extra compensation;
- how each payment is taxed;
- an agreed reference, and what will be said about why you left;
- confidentiality, and sometimes promises not to say negative things about each other;
- the claims you're giving up;
- returning company property.
Check that what you're offered at least covers what you'd be owed anyway: your statutory redundancy pay, notice pay and holiday pay. Our calculators work those out.
Tax on settlement payments
The first £30,000 of a genuine redundancy or termination payment is usually tax-free. Pay instead of notice, holiday pay and wages are taxed as normal earnings, even inside a settlement agreement. Ask your adviser to check the tax treatment of each payment.
Time to think, and protected conversations
Acas's code of practice says you should have a reasonable time to consider an agreement, normally at least 10 calendar days. Don't let anyone rush you.
Your employer may suggest an off-the-record chat about leaving (a "protected conversation"). What's said usually can't be used in an ordinary unfair dismissal claim, unless there was improper behaviour such as pressure or harassment. It can still be used in some other claims, such as discrimination.
Before you sign
- Work out what you're owed anyway with our redundancy pay, notice pay and holiday pay calculators.
- Get independent advice: it's required, and it's usually partly or fully paid for.
- Check the reference wording and the leaving date.
- Ask about anything that's unclear, and negotiate if the offer seems low.
- Keep a copy of everything you sign.