What a settlement agreement gives you
- A binding waiver of the statutory and contractual claims listed.
- A known cost and a known leaving date.
- Confidentiality about the terms, within legal limits.
- Reaffirmed restrictions on competition and solicitation.
- Management time back. A contested capability or disciplinary process can run for months.
It does not give you a right to dismiss. Until the agreement is signed the employee remains employed, and refusal is not a ground for dismissal.
When it is the right tool
| Good use | Poor use |
|---|---|
| Enhanced redundancy terms in exchange for a waiver | Routine substitute for managing performance |
| A senior exit where both sides want a clean break | Removing someone shortly after a grievance, pregnancy or disclosure, with no other rationale |
| Resolving a live dispute or tribunal claim | Paying off repeated complaints about the same manager without addressing the cause |
| Breakdown in working relationships that process will not fix | Where a short, fair process would resolve the issue at lower cost |
Acas makes the same point: settlement agreements are not a replacement for good management, and overuse affects how the wider workforce sees the organisation.
The statutory conditions
For the waiver to bind, the agreement must:
- be in writing;
- relate to the particular complaints or proceedings;
- be made after the employee received advice from a relevant independent adviser on its terms and effect, in particular on their ability to pursue claims before a tribunal;
- identify the adviser, who must be covered by insurance or a professional indemnity;
- state that the conditions regulating settlement agreements under the relevant Acts are satisfied.
Each statute has its own version of these conditions, so the agreement must cite each Act under which claims are waived. See the drafting checklist.
The process in outline
- Decide the rationale and the fallbackWhy is an exit appropriate, and what will you do if the employee says no?
- Price the offerSee how much to offer.
- Hold the conversationSee how to offer a settlement agreement.
- Send written terms and the draft agreementAllow at least 10 calendar days.
- NegotiateUsually with the employee's solicitor.
- Sign and payOn the dates in the agreement, with the tax treated correctly.
What has changed for employers
- 1 October 2026. Tribunal time limits doubled to six months for acts on or after that date. An unsettled exit stays a live risk for longer.
- 30 October 2026. The duty to prevent sexual harassment rises to "all reasonable steps" and liability for third-party harassment returns.
- 1 January 2027. Unfair dismissal rights are due to apply after six months' service, and the cap on the compensatory award is due to be removed. Exits of short-service and highly paid staff carry more risk than before.
- During 2027. Confidentiality terms that stop workers speaking about harassment or discrimination are due to become void, save for excepted agreements meeting conditions set in regulations.
Templates written before 2026 need reviewing. Our Employment Rights Act timeline has the dates.
Common employer mistakes
- Telling the employee they will be dismissed if they refuse.
- Giving 24 or 48 hours to decide.
- Relying on the protected conversation rule where discrimination or whistleblowing is in play.
- Offering only what the employee is owed anyway.
- Describing notice pay as compensation to save tax.
- A legal fee contribution too low for the adviser to do a proper job.
- Using a confidentiality clause without the statutory carve-outs.
- Abandoning the underlying process, then having no fair basis to dismiss when talks fail.
Frequently asked questions
When should an employer use a settlement agreement?
When you want certainty that an exit will not lead to a claim: enhanced redundancy terms, senior departures, disputes involving discrimination or whistleblowing allegations, and cases where a fair process would take longer than the business can bear.
Can we use a settlement agreement instead of a fair process?
You can offer one, but the employee can refuse. If they do, you must be ready to run the process properly. Do not let the offer compromise it.
How much does a settlement agreement cost an employer?
Contractual entitlements, a compensation payment, a contribution to the employee's legal fees, your own legal costs and employer National Insurance on any termination payment above £30,000.
Does a settlement agreement need to be signed by a solicitor?
The employee's independent adviser must be identified in the agreement and normally signs a certificate confirming the advice. Without that, the waiver of statutory claims is ineffective.
Sources
About this guide. This page is general information, not legal advice, and reflects the law and published government plans on the date shown above. Frederick George is a legal referral service, not a law firm. For advice on your own circumstances we will introduce you to an SRA-regulated solicitor.