A Settlement Agreement (also called a Compromise Agreement, although the term 'settlement agreement' has been the statutory name since 29 July 2013 following the Enterprise and Regulatory Reform Act 2013) is a legally binding written contract between an employer and an employee in England and Wales under which the employee agrees, in exchange for a financial payment and other terms, to waive their right to bring specified employment law claims against the employer. It is the principal mechanism by which employment disputes — whether actual or potential — are resolved without litigation in the Employment Tribunal.

The legal framework governing settlement agreements is primarily set out in section 203 of the Employment Rights Act 1996 (ERA 1996), which provides that an agreement can only exclude or limit an employee's statutory rights (such as the right to bring an unfair dismissal claim) if certain conditions are met. The equivalent provisions for other statutory claims are found in section 147 of the Equality Act 2010 (for discrimination claims), regulation 35 of the Working Time Regulations 1998 (for holiday pay claims), section 49 of the National Minimum Wage Act 1998, and various other statutes. Without satisfying these conditions, a settlement agreement is ineffective to compromise statutory employment rights regardless of what it says.

The most critical condition is the requirement for the employee to receive independent legal advice from a 'relevant independent adviser' — defined in s.203(3)(b) to include a qualified solicitor or barrister, a Fellow of the Institute of Legal Executives, a certified trade union official, or a certified advice centre worker. The adviser must be independent of the employer and must hold current professional indemnity insurance. This requirement exists to ensure that employees are not pressured into signing away their statutory rights without fully understanding the consequences.

This template creates a comprehensive settlement agreement suitable for use in England and Wales covering all principal statutory claims (unfair dismissal, wrongful dismissal, discrimination, holiday pay, redundancy pay, and others), includes the mandatory independent legal advice certificate, addresses the complex tax treatment of settlement payments under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), and provides optional provisions for confidentiality, agreed reference, and post-termination obligations.

A Settlement Agreement is needed in any situation where an employer and employee are terminating the employment relationship and the employer wants legal certainty that the employee cannot subsequently bring employment tribunal claims. The most common scenarios include: redundancy situations where the employer wants to resolve the matter quickly and cleanly without the risk of unfair dismissal claims; performance management situations where the employer has concerns about the employee's performance and wishes to agree a mutual exit rather than go through a potentially protracted performance improvement process; disciplinary situations where the employer has concerns about the employee's conduct and wants to resolve matters commercially rather than through a formal hearing; restructuring exercises where multiple positions are being eliminated and individual negotiations produce different settlement outcomes; and disputes where the employee has already raised a grievance or indicated an intention to bring tribunal claims.

Settlement agreements are also commonly used where there is a breakdown in the working relationship between an employer and a senior employee (particularly at director level), where the continuation of employment is not practicable but there is no clear conduct or performance basis for dismissal, and where a negotiated exit is in both parties' interests. In such cases, the settlement agreement may provide not only financial compensation but also positive obligations on the employer — such as an agreed reference, a positive announcement to colleagues, and a waiver of post-employment notice obligations.

Section 111A of the ERA 1996 (inserted by the Enterprise and Regulatory Reform Act 2013) allows employers to have 'protected conversations' with employees about a potential exit, provided the discussion is genuinely without prejudice and there is no improper behaviour. Offers made in protected conversation cannot be referred to in subsequent unfair dismissal proceedings, giving employers some protection when raising the prospect of a settlement agreement. However, protected conversation protection does not apply to discrimination claims, so care must be taken where discrimination issues may be relevant.

A legally effective Settlement Agreement for use in England and Wales must contain the following key elements:

Statutory Compliance Certificate — The agreement must state that the conditions of section 203(2)(f) and (3) of the ERA 1996 (and equivalent provisions of the Equality Act 2010 and other statutes) are satisfied. Without this, the agreement cannot effectively waive statutory employment claims.

Specific Identification of Claims — Unlike a general release in a commercial contract, a settlement agreement must specifically identify the statutory rights being waived. A generic 'all claims' waiver is insufficient. The agreement should list each relevant statutory right and claim by name and statutory reference (e.g. unfair dismissal under ss.94–134A ERA 1996, discrimination under the Equality Act 2010). This template provides a comprehensive list of the most common employment claims.

Independent Legal Advice Certificate — A separate certificate (set out at the end of the agreement) must be signed by the independent adviser confirming that they have given advice on the terms and effect of the agreement and that the statutory conditions are satisfied. The certificate should also confirm that the adviser holds current professional indemnity insurance and is not acting for the employer.

Settlement Payment and Tax Apportionment — The agreement must clearly specify the total settlement sum and how it is broken down between (a) contractual elements (salary, holiday pay, bonus) which are always taxable as earnings, (b) payment in lieu of notice (PILON) which is taxable in full following the Finance Act 2018 post-employment notice pay rules, and (c) non-contractual ex gratia compensation which may benefit from the £30,000 income tax exemption under s.403 ITEPA 2003. Failure to apportion the payment correctly can result in unexpected tax liabilities for the employer and employee.

Contribution to Legal Costs — It is standard practice for the employer to pay a contribution toward the employee's legal costs of taking independent advice on the settlement agreement. This contribution is itself free from income tax as a disbursement made solely for the purpose of taking advice on the agreement.

Whistleblowing and Protected Disclosure Carve-Out — Any confidentiality clause must expressly carve out the employee's statutory right to make a protected disclosure under ERA 1996 s.43B and to report suspected criminal activity or regulatory breaches to the relevant authorities. A confidentiality clause that attempts to suppress protected disclosures is void under ERA 1996 s.43J.

Post-Termination Obligations — The agreement should address the employee's continuing post-termination obligations, including any restrictive covenants in the employment contract, and confirm that the settlement payment represents consideration for compliance with those obligations.

Return of Property and Data — The agreement should require the employee to return all company property and delete all confidential company information from personal devices by the termination date, to comply with the employer's obligations under the UK GDPR and Data Protection Act 2018.

Governing Law — The agreement must state that it is governed by the laws of England and Wales and that any disputes are subject to the exclusive jurisdiction of the courts of England and Wales (including the Employment Tribunal).