Layoffs and exits · 6 min read
What is a settlement agreement, and should I sign one?
A settlement agreement ends your job on agreed terms in exchange for giving up claims. What it contains, the legal advice rule, tax, timing and what to negotiate.
The short answer
A settlement agreement is a legally binding contract in which your employer pays you an agreed sum, and you give up the right to bring certain claims against them, such as unfair dismissal or discrimination, at an employment tribunal. In the UK it's only valid if you've had advice from an independent qualified adviser, usually a solicitor, which employers commonly pay for. They're used for redundancies, failed performance processes, disputes and quiet exits. Before signing, check what you're giving up, how the payment is split between taxed and untaxed parts, the reference you'll get, and any restrictions on what you can say or do afterwards. Most terms are negotiable.
Key takeaways
- It's only binding if you've had independent legal advice, which your employer usually funds.
- Acas recommends at least 10 calendar days to consider the terms.
- Up to £30,000 of compensation for loss of employment is normally tax-free; notice pay and holiday pay are taxed.
- The payment, your leaving date, the reference and what's announced are all negotiable.
On this pageWhat a typical agreement contains
What a typical agreement contains
| Clause | What it does | What to check |
|---|---|---|
| Termination date | When your job ends | Bonus, vesting or service milestones just after it |
| Payments | Notice, holiday, compensation | Which parts are taxed; when it's paid |
| Waiver of claims | The claims you give up | Any claim you don't want to waive, such as personal injury or pension |
| Confidentiality | Keeps the terms private | You can still talk to family, advisers and regulators |
| Non-disparagement | Limits what you say about them | Make it mutual |
| Reference and announcement | What others are told | Attach the exact wording |
| Restrictive covenants | Limits on competing or poaching | Ask for them to be reduced or released |
| Legal fees | Contribution to your advice | Enough to cover a proper review |
How the tax works
Pay you'd have earned anyway, such as salary to your leaving date, pay in lieu of notice and holiday pay, is taxed as normal earnings. A genuine compensation payment for losing your job is normally free of income tax and National Insurance up to £30,000, combined with any statutory redundancy pay. Above £30,000, it's taxed as income. A well-drafted agreement shows each element separately, so you can check the split.
Timing
- Acas's code recommends a minimum of 10 calendar days to consider a proposed agreement, unless you agree to less.
- Time limits for tribunal claims are short, usually three months less a day from the dismissal, starting with Acas early conciliation. Don't let negotiations run past them without advice.
- Payment is usually made within 14 to 28 days of the agreement being signed or your leaving date.
What to negotiate
- The headline sum, with reasons: your length of service, the time it will take to find similar work, the strength of any claim.
- Garden leave instead of an early exit, so you keep salary, benefits and pension contributions longer.
- A bonus or commission you've mostly earned.
- An agreed reference and a mutual non-disparagement clause.
- Release from or shortening of non-compete restrictions.
- Keeping your laptop or phone, outplacement support or a training budget.
Illustrative example: reading the gaps
A project manager is offered three months' pay to leave after a dispute. Her solicitor points out that the agreement includes a six-month non-compete and no reference. She negotiates the non-compete down to three months, an agreed reference and a mutual non-disparagement clause, and the compensation up by a month, because her employer wants the matter closed before a restructure is announced.
Questions people ask
- Do I have to sign a settlement agreement?
- No. It's an offer. If you don't sign, your employer may carry on with a formal process, such as a redundancy or performance procedure, and you keep any rights you'd otherwise have. Some offers are withdrawn if refused, so get advice on how strong your position is before saying no.
- Who pays for the legal advice?
- Most employers contribute, commonly a few hundred pounds plus VAT, and more for senior or complex cases. Ask for the contribution to be written into the agreement. If the solicitor's fee is higher, ask your employer to increase the contribution before paying the difference yourself.
- What is a protected conversation?
- Under section 111A of the Employment Rights Act, an employer can propose a settlement in a conversation that usually can't be used as evidence in an ordinary unfair dismissal claim, as long as they don't behave improperly, for example by putting undue pressure on you. It doesn't protect discrimination or whistleblowing claims.
- How much should a settlement agreement be?
- There's no formula. It usually starts with what you'd get anyway (notice, holiday, statutory redundancy if relevant) and adds a sum reflecting the strength of any claims you're giving up and how much your employer wants a clean exit. A few weeks' to a few months' pay on top is common; strong discrimination claims can be worth far more.
- Can I still get a reference?
- Yes, and you should agree the wording now. Most agreements include an agreed reference and an agreed announcement to colleagues and clients. Without one, your former employer only needs to give a reference that is accurate and fair, which may be shorter than you'd like.
Exercises are practice, not evidence of career fit or a qualification. How to read our guides and report a correction.
Sources
- Settlement agreements · Acas
- Termination payments and benefits · HMRC, GOV.UK
- Dismissal: your rights · GOV.UK
How this page is written
Sources support the factual background, not a guarantee that an exercise predicts career fit. Fictional practice material is labelled. Dates record content updates; no independent expert review is implied. More about OffLadder.