Settlement Agreements: What They Are and Before You Sign
How settlement agreements waive employment claims under the Employment Rights Act 1996, the conditions that make them valid, and what to check before signing.
What a settlement agreement does
A settlement agreement is a contract that ends your claims, usually in exchange for money. Once signed correctly, you generally cannot later bring the claims it covers to an Employment Tribunal. That is why the law surrounds it with protective conditions.
What makes it valid
To validly waive statutory employment claims, section 203 of the Employment Rights Act 1996 requires that the agreement:
- is in writing;
- relates to the particular complaint or proceedings;
- is signed after you received advice from an independent relevant adviser (usually a solicitor) on its terms and effect;
- identifies that adviser, who must hold indemnity insurance; and
- states that the statutory conditions are satisfied.
An agreement that skips these steps may not effectively waive statutory claims. Employers normally contribute towards the cost of your legal advice.
Protected conversations
Employers can raise settlement before any dispute through a “protected conversation.” Under section 111A, pre-termination negotiations are generally inadmissible in an ordinary unfair dismissal claim. There are limits — for example where there has been improper behaviour, or for claims like discrimination or whistleblowing — so do not assume everything said is off the record.
Before you sign: a checklist
- Are you being rushed? A fair process usually allows reasonable time to consider.
- What exactly are you waiving, and is anything carved out (like accrued pension or personal injury you do not yet know about)?
- Is the payment fair against what a claim might realistically be worth? Compare with a schedule of loss.
- Is there an agreed reference and an agreed reason for leaving?
- How are the tax treatment and notice pay handled?
- Is the employer paying your legal costs?
If you do not sign
Declining a settlement agreement leaves your potential claims intact, subject to the usual time limits. If the underlying issue is a dismissal you believe was unfair, the routes and deadlines are the same as any other claim — start with ACAS and time limits.
How TribunalKit fits in
TribunalKit does not review or advise on settlement agreements — those require a qualified independent adviser. Where you decide not to settle and instead prepare a claim, TribunalKit can help organise a draft of the particulars from your facts, which you review before filing.
Product page: TribunalKit claim builders.
FAQ
What is a settlement agreement?+
A settlement agreement is a legally binding contract in which an employee agrees to waive employment claims, usually in return for a payment. It was previously called a compromise agreement.
Do I have to take legal advice before signing?+
Yes, for the agreement to validly waive statutory claims. Under the Employment Rights Act 1996 section 203, the employee must receive advice from an independent relevant adviser (usually a solicitor) who is identified in the agreement and has professional indemnity insurance. Employers usually contribute to that legal cost.
Can I negotiate the terms?+
Often, yes. The first offer is not always the final one. You can seek to negotiate the payment, a reference, the wording of reasons for leaving, and the scope of what you are waiving. Advice is important because you are giving up rights.
Is a settlement payment tax-free?+
Some genuine termination payments can be paid tax-free up to a threshold, but pay in lieu of notice and other elements are generally taxable, and the rules are technical. Always check the current HMRC position and take advice on your specific figures.
Can TribunalKit advise me on a settlement agreement?+
No. TribunalKit does not review settlement agreements or give legal advice. Settlement agreements specifically require independent legal advice from a qualified adviser.