Compensation Matters

Settlement Agreements – What are they?

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If you need advice or assistance concerning a settlement agreement or dispute with your employer, our Employment Law Edinburgh can assist you. We have a complete understanding of the most important terms and considerations of settlement agreement documents, and we will fight to negotiate the best deal for you. Employment Law Edinburgh is powered by Thompsons Solicitors, a team of expert employment lawyers with decades of experience in helping employees with settlement agreements. We offer a free initial consultation and can often work with clients on a no-win, no fee basis.

Get expert Settlement Agreement advice from one of our Employment Lawyers today - call us 0131 322 1032 or complete our online enquiry form; and we will get back to you right away. We look forward to helping you move forward in your working life. 

It is not unusual that in some circumstances, employees and employers may reach a stage in their relationship when they look to terminate all future association with each other, as a result of a dispute which has not been settled. Alternatively, a business may need to make changes to its personnel due to changes in need or owing to the wider commercial environment. These objectives are normally met through the use of what are known as Settlement Agreements. A Settlement Agreement is a legally binding document (a contract) that ends the employer-employee relationship. As mentioned earlier, Settlement Agreements do tend to be used to bring an end to a dispute between an employee and an employer. Generally, it is an employer who will propose that a Settlement Agreement is used to end the employer-employee relationship. However, it is open to employees to suggest that they are used.

The terms of a Settlement Agreement will be particular to the dispute in question, but will normally provide for an employee leaving their position with an organisation, and waiving any future right to bring a claim before an Employment Tribunal. In return, a business will normally issue a level of financial compensation, and provide a reference to allow an individual to pursue employment elsewhere.

What do I do with an Employment Settlement Agreement?

A Settlement Agreement (formally known as a compromise agreement) is a legally binding contract (document). As a result, its use and signing by an employee carries with it certain legal consequences. Furthermore, in order for a Settlement Agreement to be recognised as legal, and binding on the parties, an employee must receive independent legal advice on the terms of the Agreement. The advice must come from an independent legal advisor, who also holds professional indemnity insurance.

What should be included in a Settlement Agreement? 

The terms of a settlement agreement are to be negotiated by the employer and the employee to find a settlement that works for both parties. However, there are certain things that should always be included in a settlement agreement document, details of which are set out below. Some of these are legal requirements and must be included in order to make the agreement legally binding. 

Notice Period

If you are to leave employment and wish to agree a notice period with your employer, this should be included in the agreement. This may either be a specific date, a period of time, a period of garden leave or a payment in lieu of notice. We will check that any notice period set out in your settlement agreement matches the terms of your employment contract. 

Details of Payment to be Made

If a payment is to be made to you, the details of this payment should be set out clearly in the settlement agreement document. This includes: 

  • When payments will be made to you
  • How much is to be paid to you
  • If you will be liable for any tax on the payment 

The clause should also set out whether the payment is in relation to employment or another factor. For example, a compensation payment relating to the termination of your employment, or to address outstanding holiday pay your employer owes to you. 

There will be a statement which outlines any tax indemnity. The first £30,000 of a termination payment under UK law is normally tax free. The statement will set out whether tax is to be paid on the payment, or if tax has been paid already. 

The reason for this statement is to allow HMRC to determine whether tax is due on the payment. You may also ask that responsibility for notifying you of any demand from HMRC be placed on your employer, and they must let you know. 

Settlement of Employment Law Claims

In most circumstances, the purpose of a settlement agreement is to settle any claim in employment law you may have against your employer. As a result, a clause waiving your right to bring any such claim should be included.

The waiver clause means that the issues set out in the settlement agreement are deemed to be settled in law and you may take no further action. However, there are exceptions to this rule such as:

  • Taking action in relation to your right to enforce the terms of the settlement agreement 
  • Anything to do with pensions
  • Pursuing a personal injury claim that you are not yet aware of, or that has not yet been raised


Normally, your settlement agreement document will include a clause related to employee warranties. Employee warranties covers things such as returning company property (laptop, company car, mobile phone etc.) and anything that contains confidential information. The warranties clause may also include confirmation that you have not breached your employment contract in any way through any act or omission. 

Legal Advice

It is a legal requirement that you receive independent legal advice on the content of a settlement agreement in order for the waiver of your legal rights to bring a claim to be valid and binding. Your legal advisor will be referenced in the agreement. 


Most employers will seek to include a confidentiality clause in their settlement agreements. This clause will dictate that you may not discuss the reasons for which your employment was terminated, or the terms included in your settlement agreement. These clauses commonly also stipulate that you may not speak about your employer, the business or your colleagues in a negative way. This clause may be reciprocal, which can be beneficial to you when seeking new employment.

Additional Benefits

If you have benefited from additional employment benefits such as private healthcare or shares, your settlement agreement will set out whether you wish these benefits to continue after your employment has ended. Where these benefits are not to be continued, this should be taken into account when calculating the financial sum to be paid. 


A claw-back clause caters for the situation where you are paid the financial sum agreed, but have subsequently breached the terms of the settlement agreement or your employment contract. As the name suggests, your employer can then ‘clawback’ some of the money paid to you. As part of our comprehensive service, we will explain all of the terms of your settlement to you, and your obligations under the law to prevent any potential breach. 

Reference and Company Statement

It is also common to negotiate a reference from an employer as part of a settlement agreement. This will usually be attached to the agreement, and can help you to find other suitable employment. 

Do I have to accept the terms of a Settlement Agreement?

Employees are not obliged to accept the terms of a Settlement Agreement that an employer offers. Where an employee believes that the proposed Settlement Agreement is unsatisfactory, the legal advisors of the employee will inform the employer that the Agreement is not accepted. As a result, the employer-employee relationship would not be brought to an end.

What happens if I accept the terms of a Settlement Agreement?

Where an employee accepts the terms of a Settlement Agreement, receives independent legal advice on the meaning of its terms and the consequences of signing such an Agreement, it will be signed and returned to the employer. The end of the employer-employee relationship, often identified as the 'Termination date' will be set down within the Settlement Agreement along with a timetable for the employee to expect payment of their financial compensation. It is generally the case that a reference will be provided by the employer, to allow the employee to find employment elsewhere.

Following the signing of the Settlement Agreement, the relationship will be brought to an end, the employee will be issued with the necessary compensation and will no longer hold any right to bring a claim before an Employment Tribunal.

Contact our Settlement Agreement Lawyers in Edinburgh

If you are thinking about using a Settlement Agreement, or have been presented with one having been unable to resolve a dispute, speak to an expert settlement agreement solicitor now. We will provide advice which takes into consideration the terms of the Settlement Agreement.

Get expert Settlement Agreement advice from one of our Employment Lawyers today - call us 0131 322 1032 or complete our online enquiry form; and we will get back to you right away. We look forward to helping you move forward in your working life. 

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