A settlement agreement is a legal contract between you and your employer that prevents a workplace dispute from going to an employment tribunal.
You and your employer will usually agree the contents together. This often includes a breakdown of payments due to you, an agreement about a reference, and a timetable for what happens next. These terms are then set out in writing and voluntarily signed by both parties.
Once the agreement is signed, the matter is legally settled. A good agreement should leave you with a fair outcome, whether that means being paid what you are owed, receiving compensation, securing an agreed reference, or in some cases even returning to your job.
In return, you agree to waive your right to bring a claim against your employer in relation to the dispute covered by the agreement. You do not have to accept the terms, but if you do, both you and your employer are legally bound by them.
You should always get independent advice before signing a settlement agreement. Failing to do so could mean the agreement is not valid. An employment solicitor or trade union representative can advise you.
What is a settlement agreement?
To be valid, a settlement agreement should be:
- Made in writing
- Signed voluntarily
- Focused on your specific dispute
- Reviewed by a named, independent legal adviser
- Clear about the terms agreed by you and your employer
- Stated to meet the legal requirements for a settlement agreement
Why is a settlement agreement made?
Your employer may ask you to sign a settlement agreement for several reasons, including saving time and legal costs and avoiding reputational damage.
For example, if you have been discriminated against at work and have strong evidence, your employer may prefer to settle rather than defend a claim they are unlikely to win. Settling can be quicker, cheaper, and less stressful for everyone involved.
It is not only employers who benefit. A settlement agreement can also give you certainty, avoid the strain of a tribunal, and provide a guaranteed outcome.
You may also be offered a settlement agreement when your employer wants to avoid a formal process. For example, instead of following a full redundancy process, they may make an offer and end your contract more quickly.
When should a settlement agreement be made?
There are two main ways an employer can stop a claim progressing to an employment tribunal:
- A COT3 agreement through ACAS
- A settlement agreement
A COT3 agreement from ACAS
If you plan to take your employer to an employment tribunal, you must first notify ACAS. Before allowing the claim to proceed, ACAS will usually offer early conciliation.
Early conciliation gives you and your employer the opportunity to discuss the dispute with the help of an independent third party. If you reach agreement, the terms are recorded in a COT3 agreement, which is legally binding.
You can think of a COT3 as a formal settlement reached through ACAS. If no agreement is reached, ACAS will issue a certificate that allows you to continue to tribunal.
A settlement agreement
Your employer does not need to wait for early conciliation before offering a settlement agreement.
An offer can be made at any stage before a tribunal hearing takes place. In some cases, settlement discussions happen very late, even shortly before the hearing itself.
If that happens, do not feel pressured into signing straight away. You should make sure the agreement is properly reviewed before committing to it.
Should I accept a settlement agreement?
You should think carefully before accepting any settlement.
At this stage, it is wise to have an employment solicitor advising you. Although legal representation is not essential for bringing a claim, it can make the process easier and help ensure your employer does not take advantage of you.
Your solicitor can check whether the terms are fair and reasonable and whether you might recover more by continuing with your claim at tribunal.
Together, you can weigh up the strength of your case against what is being offered. If your solicitor believes the offer is too low or the terms are unfair, they may be able to negotiate a better agreement on your behalf.
If you receive certain state benefits, such as Universal Credit, the financial outcome can also affect your decision. This is another reason why independent legal advice is so important before you sign.
If either side breaks the agreement, for example if your employer fails to pay or you later try to bring a claim covered by the agreement, that may amount to a breach of contract.
The decision to accept or reject a settlement agreement is entirely yours.
The Law Superstore helps you compare and connect with employment solicitors who can guide you through a settlement agreement and help you secure a fair outcome.
Terms Included in a Settlement Agreement
A settlement agreement is a legally binding document between an employer and an employee, typically used to resolve a dispute or agree the terms of employment ending. The exact terms can vary, but they commonly include the following:
- Compensation details covering the amount of any settlement payment, which may include redundancy pay, unpaid wages, bonuses, or compensation for loss of employment.
- Waiver of claims confirming that the employee agrees not to pursue legal claims against the employer, such as unfair dismissal or discrimination claims.
- Confidentiality clause setting out what both parties can and cannot disclose about the agreement or the circumstances leading to it.
- Reference clause explaining whether a reference will be provided and, in some cases, the wording that will be used.
- Return of company property requiring the employee to hand back any business property in their possession.
- Post-termination restrictions dealing with issues such as non-competition, non-solicitation, or non-disparagement.
- Tax indemnity setting out responsibility for any tax liabilities linked to payments made under the agreement.
- Legal fees stating whether the employer will contribute to or cover the legal costs of reviewing the agreement.
What to Ask for in a Settlement Agreement
When negotiating a settlement agreement, it is important to make sure your interests are fully protected. You may want to ask for:
- Fair compensation that reflects your full entitlements, including unpaid salary, bonuses, holiday pay, and compensation for the loss of your job.
- An agreed reference that is positive or at least neutral, with the wording confirmed in advance.
- Clear waiver terms so you understand exactly which claims you are giving up and what that means in practice.
- Reasonable confidentiality terms that still allow you to speak to immediate family members or professional advisers if needed.
- Clarity on tax so you understand how payments will be treated and who is responsible for any additional liability.
- Payment of legal costs so your employer covers the cost of the independent advice needed to make the agreement valid.
- Outplacement support such as career coaching or job search support, especially in redundancy situations.
- Continuation of benefits where appropriate, such as health insurance or other contractual benefits for a limited period.
- Enough time to consider the offer so you can review it properly before signing.
- Reasonable restrictive covenants that do not unfairly limit your ability to work elsewhere after leaving.
Independent legal advice is essential when negotiating a settlement agreement. It helps ensure you understand your rights, the value of your claim, and whether the terms offered are genuinely in your best interests.