What a settlement agreement is, when they are used, whether you have to sign, and what happens if you do not.
A settlement agreement is a legally binding contract between an employer and an employee that brings the employment relationship to an end on agreed terms. In exchange for signing, the employee waives the right to bring employment claims against the employer, typically in return for a financial payment. To be legally valid, the employee must receive independent legal advice from a qualified solicitor before signing.
Yes, a settlement agreement is a legally binding contract. Once both parties have signed, it is enforceable in the same way as any other contract. Neither party can unilaterally withdraw from it after signature. This is why taking independent settlement agreement legal advice before signing is not just advisable but a legal requirement.
A settlement agreement should cover all the key terms of the employee’s departure. Most agreements include the following:
The exact contents will vary depending on the circumstances of the departure and the seniority of the employee.
Yes, a settlement agreement should include notice pay in some form. You are entitled to your contractual or statutory notice pay, whichever is greater. Your employer can either require you to work your notice period or pay you in lieu of notice (PILON). If your contract includes a PILON clause, that payment is fully taxable regardless of how it is described in the agreement.
A reasonable settlement agreement is one that fairly reflects both your contractual entitlements and the specific circumstances of your departure. Your contractual entitlements are the floor, not the target. A reasonable offer typically goes beyond this to reflect factors such as:
A settlement agreement is not the same as redundancy, though the two often go hand in hand. Redundancy is a reason for dismissal. A settlement agreement is a legal document used to record the agreed terms of an employee’s departure. An employee can be made redundant without a settlement agreement, and settlement agreements are used in many situations that have nothing to do with redundancy.
A settlement agreement is not itself a form of redundancy. Redundancy is a specific legal reason for dismissal, and it carries its own statutory rights including redundancy pay for employees with two or more years of service. A settlement agreement may be offered as part of a redundancy process, but it is a separate legal document that governs the financial and practical terms of the employee’s exit.
A COT3 is a settlement agreement reached through the ACAS Early Conciliation process. Before an Employment Tribunal claim can be issued, employees must notify ACAS, which then offers a free conciliation service. Any agreement reached through this process is recorded on a COT3 form rather than a formal settlement agreement. The practical effect is similar: the employee receives a financial settlement and waives the right to pursue their claim.
A PAYE settlement agreement is an arrangement between an employer and HMRC, not between an employer and an employee. It allows employers to settle the income tax and National Insurance due on certain minor or irregular benefits provided to employees, rather than putting them through payroll. It is a separate concept from an employee settlement agreement and should not be confused with the type of agreement GTE advises on.
Employers offer settlement agreements for a number of reasons, most of which come down to managing risk and achieving a clean exit. Common reasons include:
In most cases, a settlement agreement benefits both parties, but the financial terms are always negotiable.
The legal requirement for independent advice, ACAS rules, the 10-day consideration period, and protected conversations.
Yes, a solicitor must sign a settlement agreement for it to be legally valid. UK law requires the employee to receive independent legal advice from a qualified solicitor, or other specified legal professional, covered by professional indemnity insurance. The solicitor signs a certificate confirming that advice has been given. Without that certificate, the agreement has no legal standing and cannot be enforced.
Yes, employers are required to contribute to the employee’s legal fees as part of the settlement. In practice, most employers cover the fee in full. At GTE, our fee is typically £350 to £500 plus VAT, and you pay nothing. This applies whether you want the agreement reviewed and signed quickly, or you want to discuss whether the offer on the table is fair.
The ACAS Code of Practice recommends a minimum of 10 days to consider a settlement agreement and take independent legal advice. Your employer may set a shorter deadline, but this can be challenged if it is unreasonable. If you feel pressured to sign without adequate time to take advice, speak to a solicitor before responding to your employer.
Whether you should accept a settlement agreement depends on the specific terms on offer and your individual circumstances. Before deciding, consider the following:
GTE can give you a clear view of whether the offer on the table is fair, at no cost to you.
Yes, you can refuse to sign a settlement agreement. Signing is entirely voluntary and you cannot be forced to accept the terms. If you refuse, your existing employment rights remain intact. However, if you are being made redundant, refusing to sign will not prevent the redundancy from going ahead. It simply means you will not receive any enhanced payment above your statutory entitlements.
If you refuse to sign a settlement agreement, the offer will typically be withdrawn and you will revert to your existing employment rights. If redundancy is the reason for the offer, the process is likely to continue regardless. You may then be able to bring an Employment Tribunal claim if you believe the process was unfair, though this comes with its own time limits, costs, and risks.
Yes, a settlement agreement can be withdrawn by either party before both sides have signed. Once both parties have signed, the agreement becomes legally binding and cannot be unilaterally withdrawn. If your employer withdraws the offer before you sign, your existing employment rights remain intact. Withdrawals after signature are rare and would require evidence of misrepresentation or duress to challenge successfully.
A settlement agreement becomes legally binding once both the employer and the employee have signed it, and the employee’s solicitor has signed the certificate of advice. Until all three signatures are in place, either party can withdraw. This is why it is important not to resign or take any irreversible steps until the agreement is fully executed.
Yes, most settlement agreements include a confidentiality clause. This typically prevents the employee from disclosing the fact of the settlement, the financial terms, or the circumstances surrounding their departure. Confidentiality clauses are standard, but their scope varies. Your solicitor will review the clause carefully to make sure the obligations placed on you are reasonable and clearly defined.
Yes, an employee can ask their employer for a settlement agreement. This is more common than many employees realise, particularly where there is an ongoing dispute, a disciplinary or performance process in progress, or a breakdown in the working relationship. Approaching your employer directly carries some risk, so it is worth speaking to a solicitor first about how to raise the conversation without prejudicing your position.
A protected conversation is a confidential discussion between an employer and an employee about a possible settlement, which cannot later be used as evidence in an Employment Tribunal claim for unfair dismissal. It was introduced under the Enterprise and Regulatory Reform Act 2013 and allows employers to propose a settlement without admitting liability. The protection does not apply if there has been improper behaviour, such as pressure or threats.
Yes, you can refuse to take part in a protected conversation. Participation is entirely voluntary and your employer cannot force you to engage. If you do attend, you are entitled to ask for time to consider what has been discussed before responding. You also have the right to be accompanied by a trade union representative or colleague if the meeting takes place as part of a formal process.
Yes, an employee can request a protected conversation. While they are more commonly initiated by employers, there is nothing to prevent an employee from raising the idea, particularly where there is an ongoing dispute or a breakdown in the working relationship. Before requesting one, it is worth taking legal advice to understand how to approach the conversation without weakening your position.
No, a settlement agreement does not need to be witnessed to be legally valid in England and Wales. What the law requires is that the employee receives independent legal advice from a qualified solicitor, who then signs a certificate confirming that advice has been given. It is that certificate, not a witness signature, that gives the agreement its legal standing.
No, it is not possible to have a legally valid settlement agreement without a solicitor. UK law requires the employee to take independent legal advice from a qualified solicitor before signing. Without that advice, the agreement cannot be enforced. The good news is that your employer is required to cover your legal fees as part of the settlement, so getting the right advice costs you nothing.
What payments are included, the £30,000 tax-free threshold, PILON, statutory redundancy pay, and what a reasonable offer looks like.
Settlement agreements are partially taxable, depending on the type of payment involved. The first £30,000 of an ex gratia or termination payment is tax-free, with no income tax or National Insurance to pay on that portion. Contractual payments such as notice pay, holiday pay, and unpaid wages are always fully taxable regardless of the £30,000 threshold. Getting the structure of your settlement right can make a material difference to what you actually take home.
A settlement agreement is calculated by adding together two distinct parts: the contractual payments your employer already owes you, and any additional compensation they are offering on top. Contractual entitlements such as notice pay, holiday pay, and unpaid wages are the starting point. The ex gratia element reflects factors including the strength of any potential employment claims, your length of service, your seniority, and how urgently your employer wants a clean break.
An ex gratia payment is a sum paid by your employer that goes beyond your contractual or statutory entitlements. It is offered in exchange for signing the settlement agreement and waiving your right to bring employment claims. The first £30,000 of an ex gratia payment is tax-free. The amount reflects factors such as the strength of any potential claims, your length of service, and the circumstances surrounding your departure.
Ex gratia payments are partially taxable. The first £30,000 is tax-free, with no income tax or National Insurance contributions due on that portion. Any amount above £30,000 is taxed at your standard income tax rate. Employer pension contributions paid directly into your pension scheme as part of the settlement can also be made free of tax, subject to your annual allowance, which is worth discussing with your solicitor before the agreement is finalised.
Ex gratia payments are not calculated using a fixed formula. They reflect the individual circumstances of your departure and are subject to negotiation. The key factors that influence the amount include:
A solicitor can give you a clear view of what a fair ex gratia payment looks like in your specific situation.
Yes, PILON (payment in lieu of notice) is fully taxable in a settlement agreement. If your contract includes a PILON clause, your notice pay is subject to income tax and National Insurance regardless of how it is described or structured within the agreement. This catches many employees out. Even where PILON is presented as part of a larger termination payment, the contractual element remains taxable in full.
Yes, you can claim Universal Credit or other unemployment benefits after a settlement agreement in most circumstances. However, if your settlement includes a payment in lieu of notice, the Department for Work and Pensions may treat that period as if you were still employed, which can delay when your claim begins. The confidentiality clause in your agreement does not prevent you from disclosing the fact of your departure to the DWP for the purpose of making a benefits claim.
Post-employment notice pay (PENP) is the taxable portion of a termination payment representing basic pay for any unworked notice period. PENP sits outside the £30,000 tax-free threshold regardless of whether your contract includes a PILON clause. Key points to note:<
How negotiations work, timelines, what happens during the advice call, and how quickly agreements can be signed.
Negotiating a settlement agreement starts with understanding what you are legally owed and whether any potential employment claims strengthen your position. Your solicitor raises concerns and makes representations on your behalf. You do not negotiate directly with your employer once legal advice is in place. Key areas to consider:
Approaching a settlement agreement discussion requires care. Before raising or responding to any settlement discussion, speak to a solicitor first. Anything said in the wrong context could be used against you in later proceedings. If your employer raises the subject, you are entitled to ask for time to take independent legal advice before responding.
Negotiating a settlement agreement can take anywhere from a few hours to several weeks, depending on the complexity of the terms and how willing both parties are to reach an agreement. Where the package is broadly fair and the terms are standard, GTE Settlement Agreements can often complete the entire process within the hour.
Payment after a settlement agreement is typically made within 28 days of the signed agreement being returned to your employer. The exact timeline should be set out clearly within the agreement itself. Contractual payments are usually processed through payroll on your normal pay date. Ex gratia payments are often made separately. If no payment date is specified, ask your solicitor to request one before you sign.
When payment is made, what happens if the agreement is broken, confidentiality obligations, and whether the agreement can be challenged.
If a company breaches a settlement agreement, the employee can bring a claim for breach of contract in the civil courts. Because a settlement agreement is a legally binding contract, the usual remedy is financial compensation for any losses suffered as a result of the breach. Common examples of employer breaches include failing to make payment on time, providing an agreed reference in a different form, or disclosing confidential information about the settlement.
An employee can breach a settlement agreement by failing to comply with the obligations they agreed to when signing. The most common breaches include:
If an employee breaches the agreement, the employer may seek to recover some or all of the settlement payment through the courts.
