Offered a settlement agreement? Learn what it means, what to check, and how to negotiate. Practical guide with expert advice from National Employees Union.
A settlement agreement is a legal document that ends the employment relationship on agreed terms. Your employer offers money. In return, you waive your right to bring claims. The offer may arrive during a disciplinary process, after a redundancy announcement, or in the middle of a workplace dispute. The timing is deliberate — your employer wants this resolved. That does not mean the offer is fair. This guide explains what a settlement agreement involves, how to assess whether the terms reflect the true value of your position, and when to negotiate for more.
Contents
- What is a settlement agreement?
- When employers offer them
- What is typically included
- Tax treatment
- Your legal requirement: independent advice
- How to assess the offer
- How to negotiate
- Signing and what happens next
- FAQs
- How National Employees Union can help
What is a settlement agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer. It is governed by Section 203 of the Employment Rights Act 1996.
The agreement typically provides that the employer will pay you a sum of money and you will waive any claims you could bring — unfair dismissal, wrongful dismissal, discrimination, redundancy pay disputes, and others. Once signed, you cannot change your mind. The waiver is final.
For a settlement agreement to be legally valid, it must be in writing, it must relate to a particular complaint or proceedings, you must have received advice from an independent legal adviser (a solicitor, trade union official, or certified adviser), the adviser must be identified in the agreement, and the adviser must have a current professional indemnity insurance policy.
Without these elements, the agreement is not enforceable. Your employer cannot rely on it, and your right to bring claims survives.
When employers offer them
Settlement agreements are used in several situations:
- During or after a disciplinary process — particularly where gross misconduct is alleged and both sides want to avoid a hearing
- Before or during a redundancy — as an alternative to the statutory process, often with an enhanced payment
- To resolve a workplace dispute — bullying, grievances, relationship breakdown, or constructive dismissal situations
- To manage an exit — where the employer wants someone to leave but does not have strong grounds for dismissal
- After a dismissal — to prevent a tribunal claim, typically with a payment above the statutory minimum
The common factor is risk. Your employer is offering money because they believe you have a potential claim — or because the process of defending one is more expensive than settling. That context matters when you assess the offer.
Many offers arrive during a redundancy exercise, so measure the figure against what redundancy pay you are owed.
What is typically included
A settlement agreement usually contains the termination date, the settlement payment (broken down by type — see tax treatment below), any payment in lieu of notice, accrued holiday pay, a reference — either agreed wording or a commitment to a factual reference, a confidentiality clause restricting what you can say about the agreement and the circumstances, a non-derogatory remarks clause (both ways, if negotiated well), a waiver of claims — the list of claims you agree not to bring, and your employer’s contribution toward your legal advice costs (typically £350–£500 plus VAT).
An agreement cannot stop you making a protected disclosure, as our guide to whistleblowing protection explains.
What to watch for
- The waiver is broad. It typically covers all potential claims, not just the obvious ones. Make sure you understand what you are giving up.
- Confidentiality can be restrictive. Check what you can and cannot say to future employers, colleagues, or family. Negotiate reasonable carve-outs if necessary.
- The reference matters. An agreed reference in the settlement agreement is binding. Without one, your employer is free to give whatever reference they choose (provided it is not misleading).
Tax treatment
Settlement payments are taxed differently depending on their nature:
| Payment type | Tax treatment |
| Pay in lieu of notice (PILON) | Taxable as earnings — income tax and NICs apply |
| Accrued holiday pay | Taxable as earnings |
| Termination payment (ex gratia / compensation) | First £30,000 is tax-free; amounts above £30,000 are subject to income tax |
| Legal fees contribution | Not taxable if paid directly to the adviser |
The £30,000 tax-free threshold is a significant benefit of settlement agreements. Structuring the payment to maximise the tax-free element is one of the key reasons to take professional advice.
Your legal requirement: independent advice
You must receive independent legal advice before signing a settlement agreement. Without it, the agreement is not valid.
Your employer will usually contribute to the cost of this advice — typically £350–£500 plus VAT. This covers a review of the agreement, an explanation of its effect, and advice on whether the terms are reasonable.
The adviser can be a qualified solicitor, a trade union official who has been certified and authorised to advise, or an advice centre worker who has been certified and authorised.
The National Employees Union provides this advisory service to members. A trained official will review the agreement, advise you on its terms, and sign the certificate confirming you received independent advice.
How to assess the offer
Weigh it against what a claim might be worth, using our guide to unfair dismissal compensation.
1. What are your potential claims worth?
The settlement replaces your claims. To assess whether the offer is fair, you need to know what those claims are worth if you pursued them.
If you have a potential unfair dismissal claim, the value includes the basic award (calculated like redundancy pay) plus the compensatory award (loss of earnings, benefits, and statutory rights). If you have a discrimination claim, there is no cap on compensation. If the situation involves constructive dismissal, factor in the strength of the evidence.
A settlement that offers less than the likely value of the claim is not a good deal — unless the risk of losing at tribunal is high.
2. What is the risk of going to tribunal?
Tribunal claims are uncertain. You could win or lose. The process takes 6–18 months. You may have to give evidence under cross-examination. The employer may have professional legal representation. Factor in the emotional and financial cost of the process, not just the potential award.
3. What non-financial terms matter?
Sometimes the reference, the confidentiality terms, or the departure narrative matter as much as the money. A settlement that offers a fair payment, an agreed reference, and mutual confidentiality may be worth more than a higher payment with no reference protection.
4. Compare to statutory minimums
If you are being made redundant, check that the settlement at least matches your statutory redundancy entitlement. If it does not, the offer is below the floor — you would receive more through the statutory process alone.
How to negotiate
Settlement agreements are negotiable. The first offer is rarely the best one. Here is how to approach it.
Knowing what a tribunal claim actually involves strengthens your position at the table.
Respond through your adviser
Do not negotiate directly with your employer. Use your trade union representative or solicitor as the channel. Professional negotiation produces better results and keeps emotion out of the process.
Identify your leverage
Your leverage is the cost and risk your employer faces if you do not agree. A strong unfair dismissal claim, a discrimination complaint, or a flawed process all increase your leverage. Name the claims you could bring. Quantify them. Your employer’s legal team will recognise the exposure.
Ask for specific improvements
Rather than asking for “more,” make specific requests: a higher payment, a stronger reference, a longer confidentiality carve-out, a contribution to outplacement services, or an extension of your benefits. Specific asks are easier to justify and harder to dismiss.
Set a realistic target
Your adviser can help you calibrate what is achievable. A settlement at 60–80% of the likely tribunal value is common, reflecting the avoided risk and cost for both sides. But every case is different.
Signing and what happens next
Once you and your employer agree on terms, the agreement is engrossed (prepared in final form) and you sign it alongside the adviser’s certificate. Alternatively, the agreement can be formalised in an Acas COT 3. The settlement payment is usually made within 14–28 days of signing.
After signing, you cannot bring the claims you waived. The agreement is final. This is why the review process matters — once signed, the door closes.
FAQs
Can I reject a settlement agreement?
Yes. A settlement agreement is an offer. You are under no obligation to accept. If you reject it, the employment relationship continues and your employer must deal with the situation through normal channels — disciplinary, redundancy, or otherwise. Rejecting an agreement has no negative legal consequences.
Can my employer force me to sign?
No. Signing must be voluntary. If your employer pressures you — by setting an unreasonably short deadline, threatening you, or implying the alternative is dismissal — that pressure should be recorded and may itself become grounds for a claim. You are entitled to reasonable time to consider the offer and take advice.
What is a “protected conversation”?
Under Section 111A of the Employment Rights Act 1996, an employer can have a confidential conversation with you about ending your employment. The contents of this conversation cannot be used in an unfair dismissal claim. There are exceptions — the protection does not apply if the employer’s conduct amounts to improper behaviour (bullying, discrimination, undue pressure).
How long do I have to consider the offer?
The ACAS Code of Practice recommends at least 10 calendar days to consider a settlement agreement. Some employers offer less. If the deadline is unreasonably short, push back in writing and request more time.
Can I negotiate after receiving independent advice?
Yes. The independent advice is about understanding the agreement. Negotiation can continue after you have been advised. In practice, many members negotiate, agree revised terms, then receive final advice before signing.
How National Employees Union can help
A settlement agreement is one of the most consequential documents you will sign in your working life. The right advice ensures the terms reflect the value of your position.
National Employees Union members get:
- Independent legal advice — the advisory service required for the agreement to be valid, provided as part of membership
- Assessment of the offer against the value of your potential claims
- Negotiation on your behalf — experienced representatives who know what enhanced terms are achievable
- Review of the full agreement — identifying restrictive clauses, gaps in the reference, or terms that need amending
- Tax structuring advice — maximising the £30,000 tax-free threshold
- Support if you decide to reject the agreement and pursue a claim
Do not sign without advice. Contact us as soon as you receive the offer.
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Written by the National Employees Union team. We advise on and negotiate settlement agreements across the UK. This guide is reviewed regularly and was last updated in August 2026. For advice on your specific situation, contact us.
