A settlement agreement is a legal contract in which a worker agrees not to bring particular employment claims, usually in exchange for a payment and agreed terms such as a reference. In the UK it's only valid if it's in writing, relates to specific complaints and the worker has taken advice from a relevant independent adviser, and Acas recommends allowing at least 10 days to consider it.
Settlement agreements, once called compromise agreements, let a UK employment dispute end without a tribunal. They can be good for both sides, but they're also easy to get wrong, and an invalid one doesn't stop a tribunal claim. Here's what Acas says about how they work.
When a settlement agreement is used
Acas describes a settlement agreement as a document setting out the terms for settling an employment dispute, such as a potential tribunal claim. It can include a payment, an agreement not to make a claim and a confidentiality clause. Either side can suggest one, and it doesn't have to end the job: Acas gives the example of using one to settle a dispute over a bonus.
Who you can make one with depends on the claim. Only employees can claim unfair dismissal, but some claims, such as discrimination, can be brought by workers or even an unsuccessful job applicant, and a settlement agreement can cover those too.
The legal conditions for a valid agreement
| Condition | What Acas says |
|---|---|
| In writing | A settlement agreement is a legal contract and must be written |
| Specific claims | It must relate to a specific complaint or claim; 'all claims' wording isn't valid |
| Independent advice | The worker must get advice from a relevant independent adviser on how it affects their rights |
| Named adviser | The agreement must name the adviser, who must be insured |
| Conditions stated | It must say that the legal conditions have been met |
The adviser can't be employed by or acting for the employer. Acas lists a qualified lawyer, a certified and authorised trade union officer, official, employee or member, or a certified and authorised advice centre worker. Employers don't have to pay for the advice, but Acas suggests offering to, as it helps make sure the worker gets it.
Protected conversations and the 10-day guidance
Settlement discussions are confidential and are sometimes called 'protected conversations', which means they usually can't be used as evidence at a tribunal. But there's a catch. Acas says that if a worker isn't given enough time to consider an offer, the settlement discussions could be used as evidence in a tribunal claim. The Acas Code of Practice on settlement agreements recommends at least 10 days, and a disabled worker may need longer as a reasonable adjustment.
What the payment can include, and the tax
The two sides agree the payment, which might cover different things, including pay for holiday not taken. Acas says tax and National Insurance are usually deducted from wages, bonuses, commission, holiday pay and payment in lieu of notice, but you don't usually pay either on the first combined £30,000 of compensation for giving up your right to make a tribunal claim and redundancy pay (as of October 2026). It also notes that tax on termination payments is a complex area, so check with a tax adviser or HMRC.
Agree when and how payments will be made, and Acas suggests paying as soon as possible after signing. If either side breaks the terms, such as missing a payment or breaching confidentiality, it's a breach of contract and the other side can make a claim.
The limits on confidentiality clauses
A confidentiality clause, sometimes called a non-disclosure agreement, can stop a worker sharing specific information. But Acas is clear it can't stop them reporting a crime to the police. And since 6 April 2026, sexual harassment is a 'qualifying disclosure' under whistleblowing law, so whistleblowers who report it are protected, and an employee dismissed for making that disclosure is treated as automatically unfairly dismissed. English universities and other higher education providers also can't use confidentiality clauses to stop workers disclosing sexual misconduct, abuse, harassment or bullying.
How the process usually runs
- One side suggests settlement, often in a protected conversation.
- The employer and worker discuss the payment, reference and any confidentiality terms.
- The employer makes a formal written offer, and Acas has a template to start from.
- The worker gets independent advice, ideally with at least 10 days to consider it.
- Both sides sign, and the agreement names the independent adviser.
- Payments are made as agreed, and the reference uses the agreed wording.
When it's not the right tool
Acas warns that settlement agreements aren't always the best way to deal with problems at work, and they shouldn't replace good management. If an offer is rejected, the employer should still try to resolve the underlying issue through fair performance or disciplinary procedures. And once signed, the worker gives up the right to bring the claims listed, including a constructive dismissal claim.
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If you're leaving on agreed terms, my guide to writing a resignation letter may still help, and employers without HR staff can use UK HR support services to check the paperwork.
My verdict
A settlement agreement can be the cleanest way to end a dispute, but only if it's done by the book: in writing, about specific claims, with real independent advice and enough time to think. If you're the employer, rushing the worker is the fastest way to make a protected conversation unprotected. If you're the worker, don't sign until your adviser has explained exactly what you're giving up.
Frequently asked questions
What is a settlement agreement?
A legal contract in which a worker agrees not to bring specific employment claims, usually in return for a payment and other agreed terms.
Is a settlement agreement valid without legal advice?
No. Acas says the worker must get advice from a relevant independent adviser for it to be legally valid.
How long should I get to consider a settlement agreement?
The Acas Code of Practice on settlement agreements recommends at least 10 days.
Is a settlement payment tax-free?
Partly. Acas says the first combined £30,000 of compensation for giving up a tribunal claim and redundancy pay usually isn't taxed, but wages, holiday pay and notice pay usually are.
Can a settlement agreement stop me reporting a crime?
No. A confidentiality clause can't stop a worker reporting a crime to the police.
Can a settlement agreement say it covers all claims?
Not validly. Acas says it must relate to specific claims, and 'full and final settlement of all claims' wording wouldn't be valid.
