Being offered a settlement agreement? Describe your situation and get instant plain English guidance on whether the offer is fair and what to do next.
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What you need to know
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between an employee and employer, usually made when employment ends. In exchange for a financial payment, the employee gives up their right to bring specified employment tribunal claims. It cannot be entered into without the employee receiving independent legal advice.
For a settlement agreement to be legally valid, you must receive advice from a qualified independent adviser — usually a solicitor — who is not acting for the employer. This adviser must sign the agreement confirming they have advised you. Employers typically contribute towards the cost of this advice, usually between £250 and £500 plus VAT.
There is no set formula for what a settlement agreement should be worth. Common components include notice pay, accrued holiday pay, an ex-gratia payment, and sometimes an enhanced amount. A solicitor can advise you on whether the offer reflects what you might receive at tribunal. Tactical considerations such as the stress and cost of litigation also matter.
The first £30,000 of a genuine compensation for loss of employment payment is usually tax-free. However, payment in lieu of notice (PILON) is fully taxable as earnings. Holiday pay, bonuses and commission owed are also taxable. Your solicitor can help you understand the tax treatment of each element of your package.
Your employer may open settlement discussions on a 'without prejudice' basis, meaning the conversation generally cannot be used as evidence in tribunal proceedings. Since 2013, employers can also initiate 'protected conversations' about ending employment even where there is no existing dispute, provided there is no improper behaviour.
You should be given a reasonable period to consider the offer and take advice — ACAS recommends at least 10 calendar days. You cannot be pressured into signing immediately. Once signed, a settlement agreement is final and binding, so take the time you need.
This guidance is for general information only and does not constitute legal advice. Always verify current figures and legislation on GOV.UK or seek professional advice for your specific situation.
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UK workers and residents have significant legal protections covering employment, housing, benefits, consumer rights and more. These rights are enshrined in legislation including the Employment Rights Act 1996, the Equality Act 2010, the Housing Act 1988, and the Consumer Rights Act 2015.
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