What Is a Settlement Agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between an employer and an employee under which the employee waives their right to bring employment tribunal claims in exchange for a financial payment and/or other benefits.
Under s.203 Employment Rights Act 1996, a settlement agreement is only valid if:
- It is in writing
- It relates to specific complaints or proceedings
- The employee has received independent legal advice from a solicitor, barrister, trade union official, or other qualified adviser
- The adviser is identified in the document and has professional liability insurance
Without ILA from a solicitor, the agreement is unenforceable — no matter what it says.
What Does a Settlement Agreement Typically Include?
What Does Your Solicitor Do for ILA?
When you receive a settlement agreement, your solicitor will:
- 📖 Read the entire agreement and explain every clause in plain English
- ⚖️ Advise on the claims you are waiving — unfair dismissal, discrimination, whistleblowing, unpaid wages — and their value
- 💰 Assess whether the offer is fair compared to what you could recover at tribunal
- 📋 Check any restrictive covenants are reasonable and do not unfairly limit your ability to work
- 🗣️ Negotiate improved terms — more money, a better reference, removal of unreasonable restrictions
- ✍️ Sign the adviser's certificate confirming you received ILA, making the agreement valid and binding
Who Pays the Solicitor's Fees?
It is standard practice for the employer to pay a contribution towards your legal fees — often between £250 and £750 + VAT. This should be set out in the agreement itself as a separate payment directly to your solicitor.
If the employer's contribution does not cover the full cost (e.g. for complex or high-value agreements requiring negotiation), your solicitor will advise you of any additional cost before incurring it. For most straightforward ILA appointments, the employer's contribution covers the full fee.
Can I Negotiate a Better Deal?
Yes — and often you should. The first offer is rarely the final offer. Common areas for negotiation include:
A solicitor who regularly handles employment disputes is in the best position to advise on what is achievable given the strength of your underlying claims.
Typical Settlement Agreement Timeline
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1
Agreement received
Your employer presents the draft agreement — often at the end of a without-prejudice meeting. Do not sign it in the meeting. You are entitled to take it away for independent advice. The standard ACAS recommendation is at least 10 calendar days.
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2
ILA appointment — within 24–72 hours
You meet or video-call your solicitor. They review the agreement, advise on all clauses, and discuss whether to negotiate. For straightforward agreements, the ILA certificate can be signed at the end of this appointment.
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3
Negotiation (if needed) — 1–5 days
Your solicitor writes to the employer's solicitors proposing amendments. Most negotiations conclude within a few rounds of correspondence.
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4
Signing — agreement executed
You sign the final version, your solicitor countersigns the certificate. The employer makes payment on the agreed date (often 14–28 days after signing).
Frequently Asked Questions
Do I have to sign a settlement agreement?
No. Signing is entirely voluntary. If you do not sign, your employment continues (or your employer must proceed via a formal process — redundancy or disciplinary). Refusing to sign a settlement agreement cannot be used against you in a tribunal. However, without-prejudice discussions and settlement offers are generally not disclosable in proceedings.
Can I still make a claim after signing a settlement agreement?
Generally no — that is the purpose of the waiver clause. However, the waiver must be specific: it only covers the claims listed in the agreement. Claims arising after the agreement date (e.g. a personal injury that manifests later), claims for pension rights, and whistleblowing claims against regulators typically cannot be waived by contract.
Is the ex gratia payment in a settlement agreement tax-free?
The first £30,000 of any genuine ex gratia (non-contractual) payment is tax-free. Notice pay (PILON) is taxable in full. Statutory redundancy pay within the settlement also counts towards the £30,000 tax-free amount. Your solicitor can advise on how to structure the payment to maximise the tax-free element.
What if I signed a settlement agreement without legal advice?
A settlement agreement signed without independent legal advice is void and unenforceable. You would still be entitled to bring tribunal claims. However, this does not apply if you received advice that simply fell short in quality — the adviser must not have been a qualified person.
Can my employer make me sign a settlement agreement?
No. An employer cannot force you to sign. A settlement agreement signed under duress (threats of losing your job unless you sign immediately) may be voidable. Employers must give you a reasonable time to take advice — the ACAS Code recommends a minimum of 10 days.