Short answers to the most common questions employees ask about settlement agreements. Click ‘Read more’ under each answer for a full guide.
1. What is a settlement agreement?
A settlement agreement is a legally binding contract between you and your employer. In it, you agree to waive your right to bring certain employment claims — such as unfair dismissal or discrimination — usually in return for a financial payment. They are voluntary, must be in writing, and you are legally required to take independent legal advice before signing.
2. How much should my settlement agreement pay me?
There is no fixed formula, but the amount typically reflects your notice pay, any accrued holiday, and an additional ex gratia payment. The size of that payment often depends on the strength of any potential claim you have, your length of service, and your salary, and the wider context. The first £30,000 of a genuine termination payment is usually tax-free.
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3. Do I need a solicitor for a settlement agreement?
Yes — this is a legal requirement, not a choice. For a settlement agreement to be valid under UK law, you must receive independent legal advice from a qualified adviser, usually a solicitor. Without this, the agreement cannot be enforced as a statutory settlement agreement. The good news is that your employer will typically contribute to your legal fee.
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4. Is my settlement agreement payment tax free?
The first £30,000 of a genuine termination payment — money paid because your employment is ending — is exempt from income tax and National Insurance. However, payments in lieu of notice (PILON), accrued holiday pay, and bonuses are usually taxable in full. The tax treatment depends on how each element of your payment is categorised. If you have not worked your full notice, or your not being paid in lieu of your notice entitlement, that can result in some of the termination payment having to be taxed as post-employment notice pay.
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5. Can I get a settlement agreement for unfair dismissal?
Yes. The risks of an unfair dismissal is one of the reasons a settlement agreement may be offered or negotiated. If your employer has dismissed you — or is about to — and you believe it was unfair, a settlement agreement can resolve the matter without going to an employment tribunal. The strength of your potential claim will usually influence the amount on offer.
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6. What should I know about settlement agreements and redundancy?
If you are being made redundant, your employer may offer a settlement agreement instead of, or alongside, your statutory redundancy payment. A settlement agreement in a redundancy situation can include enhanced redundancy pay, notice pay, and other benefits. It will also require you to waive any claims, so it is important to understand what you are giving up before signing.
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7. What does ‘without prejudice’ mean in a settlement agreement?
‘Without prejudice’ means that conversations or correspondence marked as such cannot generally be used as evidence in legal proceedings. Employers often use this label when making a settlement offer to protect themselves if negotiations break down. Related to this is the concept of a ‘protected conversation’ under section 111A of the Employment Rights Act 1996, which applies specifically in dismissal situations. There are technical conditions that need to be satisfied for the without prejudice rule or a protected conversation to apply.
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8. What does the confidentiality clause in my settlement agreement mean?
A confidentiality clause — sometimes called a non-disclosure agreement or NDA — typically prevents you from discussing the existence and terms of the settlement, as well as the circumstances surrounding your departure. It usually covers conversations with friends, family, and future employers, though there are often carve-outs allowing you to make what are known as permitted disclosures. Breaching confidentiaialty can have serious financial consequences.
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9. Can my employer give me a bad reference after a settlement agreement?
Many settlement agreements include an agreed reference — a pre-approved form of words your employer will use if contacted by future employers. Without this, there is generally speaking no legal obligation on your employer to provide a reference. Negotiating an agreed reference as part of your settlement is strongly advisable, particularly if the circumstances of your departure were difficult.
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10. Who pays my legal fees in a settlement agreement?
It is standard practice for your employer to make a contribution towards your legal fees as part of the settlement agreement. This is typically between around £500 plus VAT – but may be more, or less, depending on the comlexity and situation. The contribution is specified in the agreement and paid directly, or reimbursed to you after you pay your solicitor. We provide a settlment agreement advice costs guarantee that our charges for advice on the agreement terms and its effect, includng signing the adviser certificate, will be fixed at your employers contribution.
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11. How long do I have to consider a settlement agreement?
The ACAS Code of Practice recommends that employees are given a minimum of 10 calendar days to consider a settlement agreement. That is not a legal requirement, and in practice employers often ask for a response sooner than that. If a timescale is is unreasonable, your solicitor can help you request more time if needed. At SettlementAgreement.UK, we understand the need to turn things around promptly and we can usually advise the same or next working day.
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12. How do I negotiate a better settlement agreement?
Negotiations sometimes take place about financial terms before a solicitor is instructed, or sometimes a solicitor may help with that. Once a draft settlement agreement is prepared, there may be some discussions about the wording needing to change, and your solicitor can handle that for you.
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13. What is a protected conversation at work?
You might notice your settlement agreement offer letter or emails uses the term ‘protected conversation’ or ‘ offer made under sections 111A of the Employment Rights Act 1996 or ‘without prejudice’. These indicated the employer is saying the offer meets the requirements for it to be deemed a confidential discussion that your employer can initiate to propose ending your employment on agreed terms under a settlement agreement, without it being used against them in an unfair dismissl claim in the employment tribunal claims. However, it does not protect against other claims such of discrimination and protection may be lost if there is improper conduct.
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Read more about the without prejudice rule →
14. Should I sign my settlement agreement?
Whether to sign depends entirely on your circumstances — the amount on offer, the strength of any claim you might have, your financial situation, and your priorities and personal goals going forward. Signing gives you certainty, a clean break and a quick outcome with little or no cost. Refusing keeps your options open but means you may need to pursue a tribunal claim, with potentially a long drawn out fight, legal costs and risks you might lose or not better the offer on the table. Your solicitor can help you weigh up both paths before you decide.
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15. Can a settlement agreement cover a discrimination claim?
Yes. Settlement agreements usually include a long list of claims being waived including discrimination claims — for example, claims relating to race, sex, disability, age, or another protected characteristic. Evidenced and strong discrimination claims may significantly increase the value of any settlement, as there is no cap on compensation at tribunal, and a tribunal can make awards for injury to feelings arising from discriminatory acts, or harassment or victimisation under the Equality Act 2010. If you believe discrimination has played a role in your situation, it is especially important to take specialist legal advice before signing any settlement agreement or COT3 agreement.
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16. What is the difference between garden leave and a settlement agreement?
Garden leave means you remain employed — and on full pay — but are asked not to come into work, usually during your notice period. A settlement agreement is a contract that brings your employment to an end on agreed terms. The two can overlap: a settlement agreement may include a period of garden leave as part of the exit package. They serve different purposes and have different legal implications.
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17. What are restrictive covenants in a settlement agreement?
Restrictive covenants, also known as post-termination restrictions, are clauses that limit what you can do after your employment ends — for example, preventing you from joining a competitor, soliciting or dealing with clients, or poaching former colleagues for a set period. They are often carried over from your original employment contract into the settlement agreement. Their enforceability depends on how reasonable they are in scope and duration.
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18. What happens to my bonus and benefits in a settlement agreement?
Bonuses, share options, private medical insurance, company car allowances, and other benefits need to be dealt with explicitly in your settlement agreement. If they are not mentioned, you may lose entitlements without realising it. Whether a bonus is payable often depends on the wording of your contract and the circumstances of your departure. Always check what you are owed before signing.
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19. Can I sign a settlement agreement due to stress or mental health issues — and what are my rights?
If your departure from work has been driven by stress, burnout, or a mental health condition — particularly if that condition amounts to a disability under the Equality Act 2010 — you may have stronger claims than you realise. Employers sometimes offer settlement agreements precisely in these situations to limit their exposure. It is important to understand your rights fully before agreeing to waive any claims.
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20. What is a COT3 agreement and how does it differ from a settlement agreement?
A COT3 is a different agreement that settles claims through ACAS — the Advisory, Conciliation and Arbitration Service — and is most commonly used when a claim has already been lodged with the employment tribunal or via an Early Conciliation Claim. Like a settlement agreement, it is legally binding and records agreed terms between you and your employer. The key difference is that a COT3 does not require you to take independent legal advice. Some employers may be less willing to contribute towards you securing advice on the COT3 but if you ask, they may agree to offer a similar contribution so you can speak to a solicitor, as they would not want the settlement to fall down at such a late stage.
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Legal Disclaimer:
This article is for general information purposes only and does not amount to (nor is it intended to be) legal, tax or financial advice or a complete or authoritative statement of the law nor should they be treated as such. No warranty or promise is given, express or implied, as to accuracy of the information on this page and no liability is accepted for any error or omission. You should instruct a specialist employment solicitor to advise you on your particular situation and not act or rely on the information on this page.