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what is a settlement agreement

Published 11 December 2017

Agreeing the way forward when the employment relationship no longer works

All working relationships do not smoothly and when they do break down it can be with damaging consequences.

Trying to resolve such matters amicably can be difficult especially with emotions on all sides often running high, as they usually do in such situations.

In these circumstances a settlement agreement (1) can be the best way to avoid an acrimonious fallout or a costly and drawn out legal battle.

Settlement agreements are legally binding and can be used by an employer, of any size, to reach an amenable end to a working relationship when there is an irretrievable dispute.  

They can be used to resolve serious employee grievances such as claims of unfair and constructive dismissal (2) or discrimination claims (3) .

It is not unusual for an employee to propose a settlement, although it will normally be done by the employer.

Main points about settlement agreements:

· Waive an individual’s rights to make a claim covered by the agreement to an employment tribunal or court.

· It must be in writing.

· It will usually include some form of agreed payment to the employee and may often include a reference.

· They are voluntary.

· The agreement can be offered at any stage of an employment relationship.

There may be a temptation for the employer to want to conclude such matters quickly and therefore rush to bring a dispute to an end in order to move on.

An employee should be allowed reasonable time to consider any proposed agreement. The ACAS Code of Practice on settlement agreements (4) specifies a minimum of 10 calendar days unless the parties agree otherwise.

The agreement will usually be reached following meetings and negotiations between the parties in order to agree the terms.  For any employer wishing to start discussions in relation to a settlement agreement it is advisable to seek advice beforehand.

Employers can have ‘off the record’ conversations with an employee in the knowledge that such conversations in certain circumstances are ‘protected’ in accordance with section 111A of the Employments Right Act 1996 (5) .

It means the pre-termination conversations and terms of a settlement are protected and cannot be used in any subsequent employment tribunal claim for unfair dismissal.

It is important that employers and do not put the employee under undue pressure, threaten or attempt to force them to accept terms that they are not happy with. In such circumstances the discussion may no longer be protected due to ‘improper behaviour’ on behalf of the employer, and the pre-termination discussion will be permissible as evidence.

Improper conduct includes all forms of harassment, bullying and intimidation; any type of discrimination; or saying before any form of disciplinary process has begun that if a settlement proposal is rejected then the employee will be dismissed.

While the agreement will set out the terms to bring the employment relationship to an end, it will also include other clauses that offer protection to both the employer and employee.

Typical clauses in a settlement agreement can include:

· All parties agree to keep the details of the settlement confidential and not to make detrimental statements about one another;

· The employee agreeing to return all of the employer's property, such as any documents, company car or computer hardware and software.

· An agreement by the employer to contribute towards the employee’s costs for legal advice in relation to the agreement. Typically, the amount of the costs contribution is between £250 and £500.

Not all payments made as part of settlement agreement are tax free. Payment of outstanding wages, holiday pay, commission and bonuses are taxable. Ex gratia (non-contractual) sums paid as compensation for loss of employment under the terms of the settlement agreement are taxable, but subject to the £30,000 tax-free exemption.

New changes to the rules on the taxation of termination payments are due to be introduced in April next year (6) . The changes will mean that all termination payments that would have been treated as general earnings if the employee had worked his or her notice period will be subject to tax and national insurance; all payments in lieu of notice, whether contractual or not, will be subject to tax and national insurance; and the £30,000 exemption will apply to payments relating directly to the termination of the employment.


1. Settlement Agreements [Internet]. Castle Associates Ltd. 2017 [cited 2017 Nov 5]. Available from:

2. Dismissal: your rights: Unfair and constructive dismissal - GOV.UK [Internet]. [cited 2017 Nov 5]. Available from:

3. What is discrimination? | Equality and Human Rights Commission [Internet]. [cited 2017 Nov 5]. Available from:

4. Settlement agreements | Acas advice and guidance. 2013 Jun 21 [cited 2017 Nov 5]; Available from:

5. Participation E. Employment Rights Act 1996 [Internet]. [cited 2017 Nov 5]. Available from:

6. Income Tax: simplifying the PAYE Settlement Agreement process - GOV.UK [Internet]. [cited 2017 Nov 5]. Available from:

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