Settlement Agreement
A settlement agreement is a legally binding contract between an employer and employee under which the employee waives the right to bring specified employment tribunal claims in return for a financial payment and/or other benefits. For the agreement to be valid, the employee must receive independent legal advice from a qualified adviser. Settlement agreements were formerly called compromise agreements.
For a settlement agreement to be valid under section 203 of the Employment Rights Act 1996, it must be in writing, relate to a specific complaint or proceedings, and the employee must have received independent legal advice from a qualified adviser (usually a solicitor) on its terms and effect. Employers typically contribute a fixed sum towards legal fees (often £350–£500 plus VAT). Payments up to £30,000 may be paid free of income tax and National Insurance contributions where they represent genuine compensation for loss of employment rather than payment for work done. Confidentiality clauses (non-disclosure agreements) are common but cannot prevent the employee from reporting illegal activity to a regulator. The employee cannot be pressured to sign; a reasonable period to consider is expected.