Settlement Agreement UK: A Complete Guide for Employers and Employees

A settlement agreement is a written contract between an employer and an employee (or former employee) that resolves an existing or potential dispute. In return — typically for a settlement payment and an agreed reference — the employee gives up the right to take specific claims to an employment tribunal or court.

The agreement is voluntary. Neither side can be forced to sign it, and either can walk away during negotiations. It can also settle a dispute while someone remains in their job. Before 29 July 2013, these documents were called compromise agreements, when they were renamed by section 23 of the Enterprise and Regulatory Reform Act 2013.

Where Acas has been involved through early conciliation, the parties often record the deal on a COT3 form instead. The key difference is that a COT3 does not require independent legal advice, because the Acas conciliator's involvement provides the safeguard. A COT3 is typically faster but offers less flexibility in drafting complex terms.

These agreements are used whenever a clean exit is worth more than the risk and cost of a formal process or an employment tribunal case. Common situations include:

• Redundancy. An enhanced package offered in exchange for a waiver of claims.
• Performance concerns. Ending employment by agreement rather than through a lengthy capability process.
• Workplace disputes. Resolving a grievance, a breakdown in working relationships, or a discrimination complaint.
• Senior departures. Settling bonus, share, and restrictive covenant issues — for example, when a director leaves and post-termination restrictions must be agreed.

For the wider exit process, our employee offboarding guide covers the practical steps once terms are settled.

Most statutory employment protections cannot be signed away by an ordinary contract. A settlement agreement is the legal exception — but only if it satisfies every condition set out in section 203 of the Employment Rights Act 1996 and equivalent provisions in other legislation.

In practice, the independent adviser is usually an employment solicitor, although a certified trade union official or advice centre worker can also fill the role. The adviser explains what rights are being given up, checks whether the offer is reasonable given the strength of any potential case, and can often help negotiate better terms.

Employers are not legally required to cover the employee's legal costs, but most make a contribution paid directly to the firm. Before instructing anyone, ask the solicitor whether their fee fits within the employer's contribution — in many cases, the employee pays nothing.

The adviser's details and their professional indemnity insurance must be named in the agreement itself. The Solicitors Regulation Authority (SRA) sets the standards applicable to any solicitor acting in this role.

Before an offer is made in writing, the parties need to discuss it. Under section 111A of the Employment Rights Act 1996, these pre-termination negotiations — commonly called protected conversations — cannot normally be used as evidence in an ordinary unfair dismissal claim. This allows an employer to raise a possible exit even where no formal dispute yet exists.

The protection does not cover discrimination claims, whistleblowing, or automatically unfair dismissal. The separate "without prejudice" rule may still protect those discussions, but only where a genuine dispute already exists between the parties.

Protection under section 111A is lost if a tribunal finds improper behaviour during the pre-termination negotiations. Examples include harassment, bullying, intimidation, or undue pressure — such as telling someone, before any disciplinary process has started, that they will be dismissed unless they accept the offer.

A structured approach protects both sides and helps the employee reach a fair outcome. Whether you are an employer making an offer or an employee receiving one, the following steps apply:

• Understand your position. List your notice period, accrued holiday, length of service, and any potential legal complaints — with a note of the evidence available for each.
• Listen to the offer. In a protected conversation, ask what is being proposed and why, without committing on the spot.
• Get it in writing. Ask for the draft agreement and take reasonable time to review it before signing.
• Instruct a solicitor. Confirm with your employer the amount of their contribution to your legal fees before advice begins.
• Negotiate the detail. The payment amount, the leaving date, any paid garden leave period, the wording of the agreed reference, and confidentiality terms can all be improved through negotiation.

There is no fixed statutory formula. The amount offered depends on what the employee is already owed — notice pay, accrued holiday, any redundancy entitlement — plus a negotiated sum that reflects the financial risk and cost to the employer of defending a tribunal claim.

The key factors that shape the figure are: the strength of any claim, the employee's salary and length of service, the likelihood of the employer succeeding at tribunal, and how quickly the employer needs the matter resolved. An employment solicitor can help judge whether the financial package is fair.

Most agreements include a tax indemnity clause, meaning the individual pays any additional tax HMRC later demands. Check this clause carefully before accepting, particularly where the financial sums are significant.

A well-drafted agreement leaves no ambiguity about what each party has promised. Most UK settlement agreements cover the following elements:

• Termination date. The last day of work and whether the employee will be placed on garden leave until then.
• Payments. Each sum, when it will be paid, and how it will be treated for tax and National Insurance purposes.
• Waiver. The specific employment claims being given up — listed by name, not described as "all claims".
• Confidentiality. What must remain private, within the limits set by law (see the section on 2026–2027 reforms below).
• Agreed reference. The precise wording to be used for future job applications.
• Adviser certificate. Written confirmation that the employee received independent legal advice before signing.

The adviser certificate can be completed electronically. Youtrust lets the employee's solicitor countersign and certify the agreement from any device, creating a timestamped audit trail that satisfies the legal requirements.

Acas publishes a free settlement agreement template with detailed guidance on each clause — it is a reliable starting point for employers and solicitors drafting a straightforward agreement. The template covers all the statutory requirements and can be adapted for most standard exits.

However, a template alone cannot replace proper legal review. Use it as a framework, not a finished document, in the following situations:

• When a template is a sound starting point: Straightforward redundancy exits with a clear financial package, no ongoing disputes, and no complex share or bonus arrangements.
• When a solicitor must be involved beyond the template: Discrimination complaints, whistleblowing situations, post-termination restrictions, executive departures with equity, or any case where the amount at stake is significant.

In every case, the employee must receive independent legal advice before signing — a template does not remove that statutory requirement.

These reforms fundamentally shift the balance of risk in many negotiations. The Acas timeline of employment law changes sets out when each change takes effect.

• From 1 October 2026: The time limit for most employment tribunal claims increases from three months to six months (minus one day in each case, as prescribed by statute). Employees will have longer to decide whether to pursue a claim — meaning unresolved disputes linger longer.
• From 1 January 2027: The qualifying period for unfair dismissal falls from two years to six months, and the cap on the compensatory award — currently the lower of £123,543 or 52 weeks' gross pay — is removed entirely.

Far more employees will hold a potential unfair dismissal claim from their seventh month of employment, and that claim could be worth considerably more. Settlement agreements will become a standard risk-management tool during an employee's first two years in post.

Confidentiality terms are also tightening. The Victims and Prisoners Act 2024 already voids clauses that prevent a victim of crime from reporting it to the police. Further NDA restrictions on workplace harassment and discrimination are expected in 2027. Our overview of UK employment law changes for small businesses covers the broader picture.

A settlement agreement gives both parties certainty — but only when it follows every rule set by law. Identify each claim being settled by name, ensure independent legal advice is given, handle protected conversations fairly, and be precise about how every payment is taxed.

With the 2026 and 2027 reforms shortening the window before employees can claim unfair dismissal and extending the time they have to bring a claim, careful handling of exits matters more than ever. The cost of getting it wrong — financially and reputationally — is rising.

Once the terms are agreed, the paperwork should not slow things down. Electronic signatures are legally valid for settlement agreements in England and Wales, and Youtrust provides the secure, compliant platform to get them signed — with a full audit trail that holds up as evidence.