A settlement agreement is a legally binding contract in which you agree not to bring employment tribunal or court claims against your employer, usually in return for a payment. It is often used when employment is ending. For it to be valid, you must receive advice from an independent legal adviser, and most employers contribute towards the cost of that advice. Whether you should sign depends on what claims you are giving up and whether the offer reflects their value.
Why do employers offer settlement agreements?
Employers use settlement agreements to end employment on agreed terms and with certainty. They might be offered in a redundancy, after a performance or conduct issue, to resolve a grievance, or simply to part ways cleanly. For the employee, an agreement can mean a quicker exit, an agreed reference and a payment, without the time, stress and uncertainty of a tribunal claim.
What makes a settlement agreement valid?
Under section 203 of the Employment Rights Act 1996 and equivalent provisions in other employment laws, an agreement only stops you bringing statutory claims if:
- It is in writing.
- It relates to particular claims or proceedings.
- You have received advice from a relevant independent adviser, usually a solicitor, on its terms and effect, in particular on your ability to bring a tribunal claim.
- The adviser is insured against claims arising from that advice and is identified in the agreement.
- The agreement states that these conditions have been met.
The adviser signs a certificate confirming they have advised you. Without it, the agreement may not be binding.
Who pays for the legal advice?
Employers usually agree to pay a contribution towards your legal fees, paid directly to your solicitor. The amount varies, and in straightforward cases it often covers the cost of advice on the agreement itself. If the employer's contribution does not cover the work, your solicitor should tell you in advance what you would need to pay.
What is usually included?
- Termination date and payment of salary up to that date.
- Notice pay, either worked or paid in lieu.
- Accrued holiday pay.
- A compensation payment, sometimes called an ex gratia payment.
- A reference, often in agreed wording.
- Confidentiality and non-derogatory clauses.
- A waiver of claims, listing the claims you agree not to bring.
- Restrictive covenants, which may be repeated from your contract.
How is the payment taxed?
The first £30,000 of a genuine termination payment, such as compensation for loss of employment, can usually be paid free of income tax and National Insurance. However, salary, holiday pay, notice pay (including payment in lieu of notice) and bonuses are taxable in the normal way. Your solicitor will check that the tax treatment in the agreement is correct.
Important: once you sign, you normally cannot bring the claims listed in the agreement, even if you later discover they were worth more. Take time to understand what you are giving up.
Should I sign it? How to judge the offer
Your solicitor will help you weigh the offer against what you might achieve through a claim. Questions to consider include:
- Do you have a strong claim? For example, unfair dismissal, discrimination, whistleblowing or unpaid wages.
- What could it be worth? Consider lost earnings, the time it may take to find a new job and any injury to feelings.
- What are the risks and costs of bringing a claim, including the time and stress involved?
- Are the non-financial terms acceptable, such as the reference, announcement and restrictive covenants?
Our guide to claiming unfair dismissal in Scotland explains the rules that are changing in 2026 and 2027, which can affect the value of a claim.
Can I negotiate?
Yes. Many agreements are improved through negotiation, both on the amount and on terms such as the reference or the leaving date. Discussions about a settlement are often held as "protected conversations" under section 111A of the Employment Rights Act 1996, which generally cannot be used as evidence in an unfair dismissal claim, although this protection does not apply in all cases, such as discrimination claims or where there has been improper behaviour.
Getting advice
Because legal advice is a condition of a valid agreement, you will need a solicitor in any case. Choose one who regularly negotiates settlement agreements and can tell you honestly whether the offer is fair. Compare the leading employment solicitors in Glasgow in our independent ranking.
Frequently asked questions
What is a settlement agreement?
A legally binding contract in which an employee agrees not to bring certain claims against their employer, usually in return for a payment and other agreed terms.
Do I need a solicitor to sign a settlement agreement?
Yes. For the agreement to be valid, you must receive advice from a relevant independent adviser, usually a solicitor, who signs a certificate.
Does my employer pay for my legal advice?
Usually. Most employers contribute towards the cost of independent legal advice, paid directly to your solicitor.
Is a settlement agreement payment tax free?
The first £30,000 of a genuine termination payment is usually free of tax and National Insurance, but salary, holiday pay and notice pay are taxable.
Can I negotiate a settlement agreement?
Yes. Many offers are improved through negotiation, both on the amount and on terms such as the reference.
Can I bring a claim after signing a settlement agreement?
Normally not for the claims listed in the agreement, which is why independent advice is required before you sign.
Conclusion
So, what is a settlement agreement and should you sign it? It is a binding agreement to give up claims in return for agreed terms, and it is only valid if you take independent legal advice. Whether to sign depends on the strength of your claims and whether the offer fairly reflects them.
Compare the leading employment solicitors in Glasgow to get your agreement checked.