Settlement agreements for employers

A settlement agreement is a contract between an employer and an employee, almost always made when the employment is ending, under which the employee gives up the right to bring claims in return for a payment and whatever else is agreed. This page is written for employers, so it covers when a company might offer one, how to raise it and what it should say. I advise on all of that and draft the agreement.

If you’re an employee who has been handed a settlement agreement and need advice before you sign, I do that work through a separate site, settlement-agreement.co.uk, which explains the process and the cost.

When employers offer a settlement agreement

The usual reason is that the alternative is slow or uncertain, or both. A capability process for someone who isn’t performing can take months and may still end in a dismissal that gets challenged, and a redundancy of one senior person can look, to that person, a lot like being singled out. Sometimes a working relationship has simply broken down and nobody wants to spend six months proving whose fault it was. I’ve written a longer piece on why businesses give employees settlement agreements.

They’re also common around a business sale, where a buyer may not want a particular director to stay, or a seller wants to deal with a long-running problem before due diligence starts so that it doesn’t have to be disclosed. In those cases the agreement needs to fit with the sale documents, and as I act on business sales as well I can deal with both.

The main thing an employer gets from a settlement agreement is certainty. Since 1 October 2026 most tribunal claims can be brought within six months of the event complained about rather than three (I’ve covered that in my article on the new tribunal time limits), so the period in which a claim can follow someone’s exit has got longer, whereas a signed settlement agreement brings that period to an end on the day.

A settlement agreement won’t always be the right answer though, because if you have a fair reason and you’ve followed a fair process, you may not need to pay anything beyond what the contract requires, and I’ll say so if I think that’s where you are.

What goes in the agreement

The core terms are the termination date, what is paid up to that date (salary, accrued holiday, any bonus or commission), whether notice is worked or paid in lieu, and the compensation payment on top. How the payments are described matters for tax, and the agreement should say which sums are paid subject to deductions and which aren’t. Your accountant or payroll provider should check the tax treatment, as my part is the drafting.

The agreement then contains the waiver of claims, which is the reason for having it in the first place. The waiver has to identify the particular claims being settled, and a general “all claims whatsoever” clause isn’t enough on its own, so I ask what has actually happened in order that the waiver covers the claims this employee might realistically have, as well as the long standard list.

Most agreements also deal with confidentiality, an agreed reference, return of company property, and a reminder (or restatement) of any restrictive covenants in the contract. Confidentiality clauses can’t stop someone whistleblowing or reporting a crime, and the government has said it will bring in further rules on confidentiality clauses in harassment and discrimination cases under the Employment Rights Act 2025. Those weren’t in force when I wrote this in October 2026, so I check the position on each agreement.

It’s also worth including what happens if the employee breaches the agreement after being paid, and a recent High Court case, which I wrote about in getting the money back when an employee breaches a settlement agreement, shows why those clauses need to be worded with some care.

The legal requirements for a valid agreement

A settlement agreement doesn’t work unless the statutory conditions are met. Under section 203 of the Employment Rights Act 1996, it must be in writing, relate to the particular complaints, and the employee must have received advice on its terms and effect from a “relevant independent adviser” who is insured to give it. The adviser has to be identified in the agreement, and the agreement has to state that the conditions are satisfied.

A relevant independent adviser is usually a solicitor, though the section also allows other qualified lawyers and certified trade union officials or advice centre workers. It can’t be anyone acting for you, so I can’t advise both sides, and neither can anyone else at Nexa on the same matter.

Protected conversations

Under section 111A of the Employment Rights Act 1996, an offer or discussion aimed at ending employment on agreed terms can’t normally be used as evidence in an ordinary unfair dismissal claim. This is usually called a protected conversation, although the protection is more limited than the name suggests.

The protection only applies to ordinary unfair dismissal, so it doesn’t apply to discrimination, whistleblowing, automatic unfair dismissal or breach of contract claims, and a tribunal can remove it where there has been improper behaviour, such as undue pressure. I’ve written about a 2026 appeal decision on exactly this in when “off the record” turns out to be on the record.

For that reason it’s best to take advice before you have the conversation and not afterwards. How the meeting is set up, what is said, and how long the employee is given to think (the Acas Code of Practice on settlement agreements is the place to start on that) all affect whether you keep the protection.

Paying towards the employee’s legal costs

There’s no law that says you must contribute to the employee’s legal fees, but nearly every employer does, as the agreement is of no use to you unless the employee takes advice and people are reluctant to pay for advice on losing their job.

In my view the contribution really ought to be £750 plus VAT, so that the employee can take good quality advice on the agreement. Many employers do offer a lower figure, though, and how much to offer is at your discretion as the employer. I’ve explained why in my article on how much employers should contribute to legal costs. A contribution that is obviously too low tends to slow things down, and it can be used as part of an argument that the employee was put under pressure.

What it costs to have one drafted

I work on a fixed fee, agreed in writing before I start. Typically my fees start at £750 plus VAT. The figure depends on whether you want the agreement only or advice on the approach and the conversation as well, and on how senior the employee is, as a director with shares and a bonus scheme takes longer than a junior employee. I’ll quote once I’ve seen the details. If you’re a new client there’s also an ID check of £30 plus VAT per director or shareholder.

If the employee refuses to sign and brings a tribunal claim, I don’t run that claim. I’d introduce you to one of my Nexa colleagues who does tribunal work, and they’d quote separately. There’s more on the other employment work I do on my advice for employers page.

Next steps

If you’d like me to help, get in touch and send me the employee’s contract, a short account of what has happened and what you’d like to offer. I’ll let you know what I think and what it will cost.