Glossary · UK
What is Settlement Agreement?
A legally binding contract where an employee waives certain employment claims, usually in return for a payment when leaving a job.
Full Definition
A settlement agreement is a legally binding contract between an employer and employee, usually used to end employment on agreed terms or to resolve a workplace dispute. In exchange for an agreed payment, the employee waives the right to bring specified claims, such as unfair dismissal or discrimination, against the employer. For the waiver to be valid, the employee must receive independent legal advice from a qualified adviser, whose reasonable fees the employer commonly pays. Payments may include notice pay, accrued holiday and an ex-gratia or compensation element. Tax treatment varies: contractual pay such as salary, bonuses and pay in lieu of notice is taxed and subject to National Insurance as normal, while genuine compensation for loss of office can usually be paid free of tax and National Insurance up to GBP 30,000, with any excess taxed. Agreements often include confidentiality, an agreed reference and restrictive covenants. Always check the figures, take advice, and understand what claims you are giving up before signing.