Settlement Agreements: What Employees Need To Know

Employer asked you to enter into a settlement or compromise agreement? Find out what a settlement agreement is and how to make the most of the opportunity.

By MyLegalAdviser - Last Updated March 2018

Where an employee has a claim against an employer (whether the employee still works for the employer or not) their employer may ask them to enter into a settlement agreement.

Employers will often give employees a very brief deadline of only a few days to decide whether to accept the agreement, so it's important employees can consult a lawyer quickly to get advice on whether the settlement offer is fair.


What is a settlement agreement?

A settlement agreement is an agreement in which an employee agrees not to pursue a potential claim against the employer in return for compensation (usually a cash sum).

What's the difference between a settlement agreement and a compromise agreement?

In July 2013 the government changed the name of compromise agreements to settlement agreements. Essentially, both types of agreement are the same but settlement agreements can be offered under any circumstance whereas compromise agreements could only be offered if there was an ongoing dispute.

When might an employer offer to enter into a settlement agreement?

There are many different potential claims an employee might have in order to warrant entering into a settlement agreement, for example: harassment in the workplace, discrimination, breach of an employment contract or wrongful dismissal.

If an employee may have grounds to bring a claim in the Employment Tribunal, an employer will often offer a Settlement Agreement in order to avoid the time and expense of going through the courts.

What is legally required?

In order to be effective, a settlement agreement must meet certain criteria, one of the most important being that an employee receives independent legal advice. The reason for this is that the employee is giving up a potentially valuable claim against their employer. It's therefore important that the employee knows what they may have been awarded in court before they accept the terms of a settlement agreement.


Employees must take independent legal advice for a settlement agreement to be legally valid. Although the employee's solicitor isn't legally required to sign the actual settlement agreement, employees will usually need to obtain a signed certificate from their lawyer confirming that they obtained independent legal advice.

How are settlement agreements taxed?

Provided the settlement agreement is structured correctly, payments made under the agreement will usually be tax free. However, where the payment is large (generally over £30,000) or the employment relationship doesn't terminate, the payment will usually be taxable.

Settlement Agreement Signature

REACHING A COMPROMISE: a Settlement Agreement can mean a quick payout and help avoid the stress of protracted court proceedings.

Does it have to mean the end of the employment relationship?

Whilst entering into a settlement agreement often means an end to the employee's contract with their employer, it doesn't necessarily have to. It's perfectly possible to enter into a settlement agreement and continue working with an employer where the claim arose during the course of employment (e.g. harassment or breach of contract).

However, it should be borne in mind that the relationship between employer and employee can often be strained by whatever led to the settlement agreement, as well as the negotiations over the agreement itself, so it's worth considering carefully whether both parties feel they can continue to work together effectively.

Does a settlement agreement only deal with a cash settlement?

Although generally the most important part, a settlement agreement can deal with more than just a cash settlement. The agreement can include other things which may benefit both the employer and the employee, for example: a contribution towards the employee's legal fees (so they can obtain independent advice), help with finding a new job, restrictive covenants (i.e. agreements not to join a competitor) and a reference.

What happens if you don't accept a settlement agreement?

Whilst it is possible to negotiate the terms of a settlement agreement, employees should take into account the time, cost and hassle of pursuing an employment tribunal claim, as well as the possibility of losing, before rejecting a settlement agreement proposal. Bringing a claim can take months or even years, meaning a lengthy wait for an award versus what is usually a quick payout under a settlement agreement.

If the employee is confident they have a claim, they (or their solicitor) will need to issue a claim against the employer at the employment tribunal. The tribunal will then require certain evidence to be presented on both sides and will list a date for a hearing.

It's worth bearing in mind that any previous negotiation over a settlement agreement will generally not be admissible in court as it will be "without prejudice" (a legal term meaning the court can't consider it when making a decision). That means that even if an employer accepts the employee has a claim during settlement negotiations, this doesn't mean this can be referenced in court. The employee may therefore be required to prove their case from the beginning in court.

During the claims process, the parties may wish to reconsider entering into a settlement agreement as taking a claim to court is generally expensive, time-consuming and stressful.


Employment claims only have a short time limit to make a claim (usually three months from the date the reason for the claim happened), so it's important to take legal advice and issue a claim quickly if an employee isn't going to accept a settlement agreement.

Do you need independent legal advice?

It's a legal requirement that employees take independent advice when entering into a settlement agreement. However, most employers will offer to pay the employees fees for taking independent advice.

As employees will be giving up a potentially valuable claim against their employer, it's important they ascertain whether the settlement agreement offer is fair in comparison to what they may have been able to claim at a tribunal (taking into account hassle of making such a claim and the chances of losing).

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