Settlement agreements, without the mystery
A settlement agreement ends an employment cleanly and finally, with both sides protected. Get it right and it's a useful tool. Improvise it and it's a liability.
By Robert Festenstein, Head of Legal
Updated 29 June 2026
5 min read
The short version
- A settlement agreement ends employment on agreed terms, with the employee waiving their claims.
- It's only valid if the employee takes independent legal advice — which is why employers usually pay for it.
- It covers the payment, a reference, confidentiality and any continuing obligations.
- The tax on exit payments is a common trap. Get the breakdown right.
What it is
A settlement agreement (the old name was compromise agreement) is a binding contract that ends an employment relationship on agreed terms. In exchange for a payment and some other terms, the employee gives up their right to bring claims. It's used for negotiated exits, to settle a dispute, or as part of a redundancy — anywhere both sides want certainty and a clean line drawn.
What makes it stick
Here's the bit people get wrong. A settlement agreement only validly waives an employee's statutory claims if strict conditions are met — the most important being that the employee has taken independent legal advice on it. That's why the employer usually chips in for the employee's legal fees. Skip the requirements and the waiver can be worthless, leaving the employer exposed to exactly the claims it thought it had bought off.
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The terms that matter
- The payment — how much, how it breaks down, and when it lands.
- The reference — an agreed form of words, often the term the employee cares about most.
- Confidentiality — keeping the terms and the circumstances private, both ways.
- Continuing obligations — confirming any restrictions that survive the exit.
- The waiver — the list of claims being settled. This is the heart of the whole document.
The tax trap
This is where settlement agreements catch people. Some of an exit payment can be paid tax-free up to a limit; other bits — anything that's really pay, notice or a contractual entitlement — are taxable. Get the breakdown wrong and either side can end up with a surprise bill. We draft the agreement so the payments are structured and described correctly — the single detail these documents most often get wrong, and the most expensive to unpick afterwards.
Frequently asked questions
Do I need a solicitor to sign a settlement agreement?
Yes — as the employee, you have to take independent legal advice on it for it to validly waive your statutory claims. Employers usually contribute to the cost. Without that advice, the agreement won't do its job.
Is a settlement payment tax-free?
Partly, sometimes. Some of it can be paid tax-free up to a limit, but anything that's really pay, notice or contractual is taxable. The breakdown in the agreement matters, and getting it wrong creates an unexpected bill — so it needs checking carefully.
Can my employer make me sign one?
No. A settlement agreement is voluntary and negotiable — you can accept, reject or push back on the terms. Proper advice lets you understand what you're giving up, and whether the offer's fair, before you decide.
Sources & further reading
This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 29 June 2026. Buzz Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).
A solicitor with more than two decades' experience in commercial law, dispute resolution, insolvency and judicial review. Robert acts for businesses, directors and individuals on the matters that carry real consequence — and leads Buzz Solicitors.
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