Settlement agreements: what they are, who pays for the advice and what it costs

A settlement agreement is a written, voluntary deal that settles an employment dispute. It only counts as valid if the worker first gets advice from an independent adviser. Employers usually pay towards that advice, though they do not have to. This guide explains what to expect and gives no figure for fees.

The short answer

If you ask what is a settlement agreement, the short answer is this. It is an agreement between you and your employer that settles a dispute at work. However, it is valid only if you get advice from a relevant independent adviser and the agreement names that adviser. Acas sets out this rule. Citizens Advice says your employer will usually pay for that advice, although Acas adds that the employer does not have to. If your dispute may end in a dismissal claim, our guide to an employment tribunal solicitor explains that route.

What a settlement agreement is

Acas describes a settlement agreement as a document that sets out the terms for settling an employment dispute. It used to be called a compromise agreement. The document is in writing, it is legally binding and it is voluntary. As a result, nobody can force you to sign one. You can read the offer, take advice and decide whether to accept. The wider employment law page on this site gives more background on the subject.

What it can include

Acas says a settlement agreement can include several things. Which ones appear depends on the deal you and your employer reach.

• a financial payment
• an employment reference
• an agreement not to make an employment tribunal claim
• a confidentiality clause

A confidentiality clause has limits, however. Acas says an employer cannot use one to stop a worker whistleblowing or reporting a crime to the police. Therefore, if the draft contains a confidentiality clause, read it carefully and ask your adviser what it covers.

What makes it valid

Acas lists several requirements. The agreement must be in writing, and it must relate to a specific complaint or claim. You must get advice from a relevant independent adviser before the agreement is made. The agreement must then name that adviser and state that the legal conditions have been met.

Wording matters here. Acas says a clause stating that the agreement is in full and final settlement of all claims would not be valid. Instead, the agreement must list the specific legal claims it covers. Because of this, check the list of claims closely and ask your adviser whether anything looks wrong or missing.

The independent adviser

The rule is simple. For a settlement agreement to be valid, you must get advice from a relevant independent adviser, and the agreement must name them. Acas says the adviser can be a qualified lawyer. It can also be a certified and authorised trade union worker or advice centre worker.

The adviser must carry insurance against loss from the advice they give. They must also be independent of your employer. Acas says the adviser must not be employed by the employer or act for the employer. For example, the company’s own lawyer cannot advise you on the deal. If you are unsure whether someone qualifies, ask them directly before you rely on their advice.

Who pays for the advice

Citizens Advice says your employer will usually pay for you to get independent legal advice on a settlement agreement. Acas takes a slightly different line. It says the employer does not have to pay for your advice but should consider offering to.

As a result, you should not assume the offer includes the cost. Check the wording of the offer, or ask your employer in writing whether it will contribute. This guide gives no amount, because the facts it relies on do not name one.

Time to decide and negotiating

You should not feel rushed. The Acas Code of Practice on settlement agreements recommends giving you at least 10 days to consider the written offer and to get independent advice. If the deadline looks shorter, say so and ask for more time.

Acas also says settlement discussions are confidential, and it calls them protected conversations. As a result, an employment tribunal or court usually cannot use them as evidence.

You can negotiate as well, because Acas says a worker can make a counter offer. So the first offer does not have to be the final one. If redundancy is ending your job, our guide to redundancy rights and advice covers it.

Tax on a payment

Acas says usually no tax or National Insurance is paid on the first combined £30,000 of tribunal-claim compensation and redundancy pay. However, other parts of a package are different. Acas says wages, bonuses, commission, holiday pay and payment in lieu of notice are normally taxed. This is general information, not tax advice, so ask your adviser how the rules apply to your own payment.

What the advice covers

Citizens Advice says the advice you get covers the terms of the agreement. It does not cover whether the agreement is a good one. Therefore, think about what you want from the deal before your meeting, and ask the adviser to explain each clause in plain words.

How to find an adviser

Start by checking whether the person advising you is regulated, and ask where to verify it. For a solicitor, that means looking them up on the regulator’s official register. Our check-a-solicitor page shows you how to do it, so try it first.

Then ask about the fee, because you should know the cost before you agree. Ask who will pay and whether your employer has offered a contribution. Also ask what happens if the advice costs more than that contribution. Ask every adviser the same questions and write down each answer to compare.