Settlement Agreements

Previously known as a Compromise Agreement a Settlement Agreement is a contract between the employer and employee in which the employee waives, withdraws and/or agrees not to pursue any employment claims against his or her employer. 

In return the employer usually pays the employee a sum of money to induce him or her to enter into the contract.  Whether the payment represents a good deal for the employee depends on a number of factors, such as:-

  • length of service.
  • salary and benefits.
  • the circumstances in which his or her employment was terminated.
  • how long it will take to secure another job.

Settlement Agreements are often presented to an employee following a dispute.  Also employers often use Settlement Agreements when making employees redundant if they are paying the employee an enhanced redundancy payment.

Below are a list of some frequently asked questions:-

Why do you need to see a solicitor?

Under a Settlement Agreement an employee agrees to waive all potential claims which he or she may have, including those which they may be unaware of.  Therefore the law requires the employee to take advice and to have the Settlement Agreement "signed off" by a ‘relevant independent adviser’ for it to be binding.

What claims are settled by the agreement?

Most employers include a lengthy list of claims which are potentially compromised, most of which are usually irrelevant.  However claims that should not be compromised include accrued pension rights (if the employee is a member of a pension scheme) and latent personal injury claims. 

What happens to my salary, holiday and notice pay?

Employees should be paid their salary and any accrued but untaken holiday up to the date of termination.  These payments are subject to income tax and national insurance deductions in the normal way.

An employee may also receive pay for his or her notice period if the employer does not require the employee to work his or her notice.  

Is the settlement/termination payment taxable?

The first £30,000 of a non contractual termination payment can be paid to the employee without deduction of income tax and national insurance.  Any sum over £30,000 is subject to deductions.

What happens if either party breaches the agreement?

Put simply the injured party is able to sue the other for damages for losses flowing from the breach.  Often there are specific clauses in the Settlement Agreement which set out that if an employee breaches the agreement the employee will have to repay the whole sum or a proportion of the money paid under the agreement and often the employer’s legal costs. There may be arguments, depending on the wording, that the repayment clause is a penalty and therefore unenforceable.

Common Settlement Agreement Clauses

Tax Indemnity

Invariably there will be a tax indemnity clause.  The crux of this clause is that the employee agrees to indemnify the employer in respect of any income tax and employee national insurance contributions payable on the termination payment and indeed often on all of the monies paid under the Settlement Agreement.  The indemnity may be triggered if Her Majesty Revenue and Customs considers  that sums which were paid to the employee free of deductions (within the £30,000 threshold) should have been taxed.  


There is often a confidentiality clause which applies to both employer and employee in that each agrees to keep the content of the Settlement Agreement confidential.  There are common exceptions on the part of the employee  that he or she can discuss the agreement with his or her spouse/partner/immediate family/legal representative, or as may be required by law.

Non-Derogatory Comments

Again Settlement Agreements generally include a clause which prevents the employee making derogatory or disparaging comments about his or her employer and this usually also extends to not making derogatory comments about their officers and employees.  

Entire Agreement Clause

The effect of an “entire agreement” clause is that the Settlement Agreement constitutes the entire agreement and supersedes all previous agreements/negotiations which the employee has entered into.  In other words if an employee has been told something on which he or she places importance and it is not referred to in the Settlement Agreement then there is no recourse if the employer does not do what it is meant to.   


It is standard to have an agreed reference annexed to the Settlement Agreement.   The majority of employers as a matter of course are now only prepared to give standard references simply detailing the job which the employee did and his or her length of service.  Any reference commenting on your character, performance and achievements would have to be individually negotiated.

Other points 

There are other points to consider if the employee:-

  • is a Director and/or has shares or share options in the employer’s business
  • has restrictive covenants in his or her contract of employment
  • is currently off sick and has the benefit of permanent health insurance
  • is pregnant
  • has raised a grievance against his or her employer.
  • has worked abroad for part of his or her employment.

If you have been given a settlement agreement to take advice on or want to discuss your situation further please call for an  initial free telephone consultation.