This article was last updated 0 months ago and may not represent current law.
Sometimes businesses need to get rid of staff.
The law says that after two years of working somewhere, an employee can only be dismissed for a fair reason.
That two-year period is about to get shorter. Where the employment ends on or after 1 January 2027, even if notice was given before then, it is six months, and the cap on the compensation a tribunal can award for unfair dismissal (currently the lower of £123,543 or 52 weeks' pay) is removed for those dismissals as well. Employees also now have six months, up from three, to bring most tribunal claims, where the dismissal or other event they are complaining about happened on or after 1 October 2026.
To avoid any claims, your business needs a settlement agreement.
Here’s what you need to know about settlement agreements.
What is a Settlement Agreement?
A settlement agreement is between employer and employee. It terminates the contract and (usually) sees the employee paid off, in return for which they agree to waive and release all and any claims against the employer.
This type of agreement brings to an end claims such as unfair dismissal and discrimination cases. It is important to note that settlement agreements should only be used in circumstances where there are potential claims to be resolved, and where there is a genuine dispute in place between the parties
Usually, employment will terminate on a specific date (called the Termination Date) and salary will be paid up until that date.
Why do you need a Solicitor to sign a Settlement Agreement?
The Law requires employees to receive independent legal advice from a solicitor or other relevant independent adviser (for example a certified trade union official) before the settlement agreement can become a legally binding document.
To be legally valid, a Settlement Agreement must:
- be in writing
- relate to a particular complaint or disciplinary proceedings
- only be signed after the employee has received independent legal advice from an identified advisor who holds the required professional indemnity insurance
- state that the conditions regulating Settlement Agreements under the relevant statutory provisions have been satisfied
How is a Settlement Agreement compensation package calculated?
There are several factors - such as an employee's age, seniority, future employment prospects and salary that are considered when calculating the financial compensation package.
A Settlement Agreement usually comprises of the following:
- payments that are part of the employment contract
- payment in place of notice
- a termination payment, including an ex gratia payment
- bonus payments/share schemes/long-term incentive plans (LTIPs)
- consideration for any confidentiality clauses and/or restraint of trade
- all other statutory/contractual claims
Obtaining expert legal advice before negotiations begin will ensure both you and your employee achieve a positive outcome.
Can non-monetary compensation be included in a Settlement Agreement?
The compensation element of a Settlement Agreement does not have to be only money. It can include non-financial benefits such as:
- the right to keep a work laptop and/or mobile phone
- a company vehicle
- gym membership and/or health insurance
- a strong reference
Depending on their circumstances, non-financial compensation may be highly valuable to your employee. Therefore, if your cash flow does not allow for a large financial settlement, you can offer your employee other forms of compensation.
Don’t assume that money is the be all and end all - if your employee is looking to start their own business, benefits such as a career coach or computer equipment could be of great help.
Is a Settlement Agreement confidential?
As an employer, one of the biggest advantages of a Settlement Agreement is that most contain a Confidentiality Clause (also known as a Non-Disclosure Clause or NDA).
An experienced Employment Lawyer can assist you with drafting a Confidentiality Clause that protects your reputation and withstands any future challenges to its legitimacy.
There are limits on what the clause can do. It can't stop whistleblowing, and since 1 October 2025 it can't stop someone who is, or reasonably believes they are, a victim of crime from going to the police, a lawyer or the other people listed in section 17 of the Victims and Prisoners Act 2024. The Employment Rights Act 2025 will also stop these clauses being used to prevent workers speaking about harassment or discrimination, although that part isn't in force yet and the government has said it expects it to take effect in 2027.
Final words
A Settlement Agreement benefits all parties.
An employee receives compensation for losing their job and this is normally greater than what would be achieved in an Employment Tribunal claim.
For the employer, the details of the dismissal will usually be kept confidential (within the limits above), and the employee is contractually barred from bringing a future claim in the Employment Tribunal.
For legal advice on the matter of Settlement Agreements, get in touch.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
