What is a settlement agreement?

A settlement agreement is a legally binding agreement between an employer and an employee. Settlement agreements are used to resolve ongoing disputes or to terminate the working relationship between the two parties in a mutually agreed manner.

Settlement agreements were first introduced in 1993. At that time, they were known as compromise agreements. However, their name changed in 2013 with the introduction of the Enterprise and Regulatory Reform Act.

Under the terms of a settlement agreement, an employee will waive their right to bring Employment Tribunal claims against their employer. In return, the employee will receive compensation usually in the form of a payment. The amount of compensation an employee can receive will vary and will depend on their individual circumstances.

An employee cannot be forced into signing a settlement agreement by their employer. A settlement agreement must be entered into voluntarily between the two parties.

Legal Requirements for a valid settlement agreement

A settlement agreement must fulfil specific requirements in order to be valid. The requirements, found in Section 203 of the Employment Rights Act 1996, are as follows:

  1. The agreement must be in writing.
  2. The agreement must relate to the particular proceedings. Essentially, this means consideration must be given to the potential claims an employee will no longer be able to bring by accepting a settlement agreement, and these claims must be specified within the agreement. Often, there will be a section annexed to the end of the settlement agreement which lists these claims.
  3. The employee or worker must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on his ability to pursue his rights before an employment tribunal. Further information regarding this can be found in the Independent Legal Advice section below.
  4. There must be in force, when the adviser gives the advice, a contract of insurance, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the employee or worker in respect of loss arising in consequence of the advice.
  5. The agreement must identify the adviser, and
  6. The agreement must state that the conditions regulating settlement agreements under this Act are satisfied.


What information is contained within a settlement agreement?

The specific provisions contained within a settlement agreement can be negotiated and agreed upon between the two parties. However, you would expect the following provisions to be included:

  1. Confirmation of the termination date and notice period. If an employee is receiving PILON (pay in lieu of notice) this will also be outlined within the agreement.
  2. A section on the withdrawal and waiver of any Employment Tribunal proceedings. There may also be a warranty within this section stating that the employee is unaware of any other claims they have against their employer.
  3. Information regarding the settlement payment the employee is due to receive, including whether the payment is subject to tax and confirmation of the timescale in which the payment will be made.
  4. Information on practical arrangements between the employer and the employee, such as the return of any relevant property to the employer.
  5. Confirmation of the employee’s ongoing duties of confidentiality and, if applicable, any restrictive covenants the employee may be subject to.
  6. The employer’s contribution to the employee’s legal fees. Further information regarding this provision can be found in the Independent Legal Advice section below.


How long do I have to consider a proposed settlement agreement?

The ACAS Code of Practice on settlement agreements states that an employee should have a minimum period of 10 calendar days to consider the proposed agreement and obtain independent legal advice - unless the two parties have agreed to a different time frame. Whilst the ACAS Code is not legally binding, if an employer chooses not to follow it, they may have to justify their decision.

Claims that may be waived under a settlement agreement

Under a settlement agreement, an employee will agree to waive their legal rights to bring Employment Tribunal claims against their employer. This is applicable to both contractual claims and statutory claims.

Contractual claims that may be waived include, but are not limited to, claims for contractual holiday pay and breach of contract.

Statutory claims that may be waived include, but are not limited to, claims for unfair dismissal, discrimination, and unlawful deduction from wages.

Claims that cannot be waived under a settlement agreement

There are, however, specific claims that cannot be waived under a settlement agreement. These include the following:

  1. Statutory sick pay,
  2. Statutory maternity pay,
  3. Statutory paternity pay,
  4. Statutory adoption pay,
  5. Statutory shared parental pay,
  6. Statutory parental bereavement pay,
  7. Claims under TUPE for failure to inform and consult; and,
  8. Claims under the Trade Union and Labour Relations (Consolidation) Act 1992 for failure to consult with employee representatives on collective redundancy.

Additionally, claims in respect of accrued pension rights and personal injury claims cannot be waived.

Can future, unknown cases be settled under a settlement agreement?

Questions have arisen as to whether settlement agreements can settle future claims that are unknown to the parties at the date of signing. However, this question has recently been clarified in the case of Bathgate Technip Singapore PTE Limited [2023] CSIH 48. In this case, the Court of Session held that unknown future claims can be settled under a settlement agreement - as long as the type of claim has been clearly identified within the agreement and the wording utilised accurately reflects this.

Independent legal advice

In advance of signing a settlement agreement, an employee must obtain independent legal advice. The employer will cover the costs for the employee to receive independent legal advice, up to an amount specified within the agreement. This will often be sufficient to cover your legal expenses and we can negotiate this with the employer if it is not.

The independent legal advisor will organise a consultation to explain the provisions of the settlement agreement and what these mean in practice. Only once this has taken place can the settlement agreement be signed by both parties and become legally binding. It should be noted that whilst the independent legal advisor can explain the provisions of the agreement, they cannot offer their personal view as to whether the offer is reasonable and whether it should be accepted by the employee.

If you have any questions, or if you are looking to obtain independent legal advice on a proposed settlement agreement, please email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 0141 333 6750 and ask to speak to Shona Christie for further information.


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