Just Received a UK Settlement Agreement: What to Do First

Last updated: 2 May 2026

A settlement agreement is a legally binding contract between an employer and an employee that ends the employment relationship and waives specified legal claims in exchange for agreed compensation. In the UK, it is governed primarily by section 203 of the Employment Rights Act 1996. The most common scenario is an employer-initiated exit, typically resulting in a lump-sum payment and a clean break.

This guide is for employees who have already been offered a settlement agreement after a redundancy, disciplinary, or performance process, or who expect one imminently. It sets out what the document must contain, what the key deadlines are, which clauses carry the most risk, and what your options are if you decide not to sign.

What is a UK settlement agreement?

A UK settlement agreement is a written contract under which you agree to give up the right to bring specified employment claims against your employer, in return for a financial payment and sometimes other benefits such as an agreed reference or extended health cover. It is the only mechanism in UK employment law that can validly waive statutory rights such as unfair dismissal or discrimination claims.

Before 2013, these documents were called compromise agreements. The name changed when the Enterprise and Regulatory Reform Act 2013 amended the Employment Rights Act 1996, but the legal function is identical. The agreement must be in writing. It must relate to a particular complaint or proceedings, not just a general waiver of all possible future claims. And it must comply with the conditions in section 203 of the Employment Rights Act 1996 to be enforceable.

Employers use settlement agreements for several reasons: to manage a redundancy cleanly, to resolve a disciplinary or performance situation without a tribunal claim, or to part ways with a senior employee whose exit needs to be handled discreetly. From your perspective, the agreement trades certainty of payment now against the possibility of a larger award later if you pursued a claim.

What must a settlement agreement contain to be legally valid?

For a settlement agreement to be legally valid under section 203 of the Employment Rights Act 1996, it must meet five conditions: it must be in writing, it must relate to a particular complaint, you must have received advice from a qualified independent adviser, that adviser must be covered by professional indemnity insurance, and the agreement must identify the adviser.

A qualified independent adviser can be a solicitor, a barrister, a certified and authorised trade union official, or a certified advice centre worker. The adviser must be independent of your employer. This is why your employer cannot simply instruct their own solicitor to advise you.

In practice, most agreements also include an adviser certificate as a schedule. Your solicitor signs this certificate to confirm they have given you the required advice. Without that signed certificate, the agreement cannot waive your statutory rights, even if you have signed the main document.

Beyond the legal minimum, a well-drafted agreement will also cover: the termination date, the breakdown of the compensation payment, tax indemnities, a reference clause, confidentiality obligations, non-disparagement obligations, and any post-termination restrictions.

How long do you have to sign a settlement agreement?

There is no fixed statutory deadline for signing a settlement agreement, but ACAS guidance recommends that employers allow at least 10 calendar days for you to consider the offer. Many employers set a deadline of 7 to 14 days in the covering letter. That deadline is often negotiable if you ask in writing.

The 10-day ACAS recommendation exists because the process of finding a solicitor, booking an appointment, and working through the document properly takes time. If your employer sets a deadline shorter than 10 days without good reason, that is worth raising. Most employers will agree to a short extension rather than risk the process breaking down or a later argument that you signed under duress.

The deadline also matters in relation to the tribunal time limit. You have three months less one day from your effective date of termination to bring an unfair dismissal claim (Employment Rights Act 1996 s.111). If you are still employed when the agreement is offered, that clock has not started. But if your employment has already ended, you need to be aware of how much of that window remains while you are considering the offer.

If negotiations drag on and you are approaching the tribunal deadline, you can apply to ACAS for early conciliation, which pauses the clock. Your solicitor can advise on the timing.

What clauses should you check before you sign?

The clauses that carry the most practical risk are the waiver clause, the tax indemnity, the reference clause, the confidentiality clause, and any post-termination restrictions. Each of these can affect your financial position or your ability to work after you leave.

The waiver clause lists the specific claims you are giving up. Read it carefully. It should not include claims that have not yet arisen, such as personal injury claims you are not yet aware of. A well-drafted agreement carves out pension rights and latent personal injury claims.

The tax clause sets out how the payment is allocated. Under ITEPA 2003 s.401, the first £30,000 of a genuine termination payment can be paid free of income tax and National Insurance. Amounts above that threshold, and any payment that represents salary, notice pay (in some circumstances), or benefits, are taxable. The agreement should clearly state which portion is ex-gratia and which is contractual. A tax indemnity clause typically requires you to repay HMRC if they later disagree with the employer's tax treatment.

The reference clause should set out the exact wording of any reference your employer will provide, or confirm that they will respond to reference requests in a specific way. A vague commitment to provide a "satisfactory reference" is not enforceable. Ask for the reference wording to be attached as a schedule.

The confidentiality clause typically prevents you from disclosing the existence or terms of the agreement. Check whether it carves out disclosure to your immediate family, your legal adviser, and HMRC. Most standard clauses do, but not all.

Post-termination restrictions (sometimes called restrictive covenants) may prevent you from working for competitors, soliciting clients, or poaching colleagues for a set period after leaving. These are only enforceable if they go no further than necessary to protect a legitimate business interest. Your solicitor can advise on whether the restrictions in your agreement are likely to be enforceable and whether they should be narrowed.

How much should the compensation be worth?

The compensation in a settlement agreement should cover at least your statutory entitlements: notice pay, accrued but untaken holiday pay, and any statutory redundancy pay if the exit is a redundancy. The ex-gratia element on top of that is what you are actually negotiating.

Your statutory redundancy pay is calculated using a formula based on your age, weekly pay (capped at £643 per week as of April 2025), and years of service, up to a maximum of 20 years. You can calculate the statutory minimum using the government's redundancy pay calculator at gov.uk.

The ex-gratia element should reflect the value of any employment claims you are waiving. If you have a strong unfair dismissal claim, the compensatory award at tribunal can be up to 52 weeks' gross pay, capped at £115,115 (as of April 2025). Discrimination claims have no cap. Your solicitor can give you a realistic assessment of what a tribunal might award, which forms the basis for negotiation.

Factors that increase the value of your position include: long service, a strong factual case, a protected characteristic involved in the dismissal, evidence of procedural failures by your employer, and any whistleblowing element. Factors that reduce it include: short service (under two years removes unfair dismissal rights), a genuine redundancy situation with a fair process, or conduct issues that might reduce a tribunal award.

The legal fees contribution your employer pays is separate from and in addition to your compensation. It is typically between £250 and £750 plus VAT for a straightforward agreement, though complex cases cost more. That contribution is paid directly to your solicitor and does not count toward the £30,000 tax-free threshold.

What happens if you refuse to sign a settlement agreement?

If you refuse to sign, the agreement falls away and your employer cannot force you to accept it. What happens next depends on the circumstances that led to the offer. Refusing does not automatically result in dismissal, but it may mean the underlying process continues.

If the offer arose from a redundancy situation, the redundancy process will typically continue. You may still be made redundant, but you would receive only your statutory entitlements rather than any enhanced ex-gratia payment. You would then be free to bring an unfair dismissal or redundancy-related claim at tribunal if you believe the process was flawed.

If the offer arose from a disciplinary or performance process, that process will resume. The outcome of that process determines whether you have grounds for a tribunal claim.

Conversations in which a settlement agreement is discussed are usually protected as "without prejudice" under common law, or as "protected conversations" under section 111A of the Employment Rights Act 1996. This means the fact that an offer was made generally cannot be used as evidence in tribunal proceedings. There are exceptions, for example if the employer behaved improperly during the conversation.

Refusing is a legitimate choice. Your solicitor can help you weigh the realistic value of the offer against the risks and costs of pursuing a tribunal claim, including the time involved and the uncertainty of the outcome.

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