Settlement Agreements – what to know


Our legal employment team frequently advise employers and employees on Settlement Agreements. The Team has considerable experience in advising employers on the use of settlement agreements, the drafting of those agreements and negotiating of the terms of settlement for those employees leaving a business. This might be due to redundancy, capability, or an existing dispute pre or post termination just to name a few examples.

Settlement agreements remain a common method of ending the employment relationship and it is a record in writing of the terms of any settlement reached between the parties.

We look at a few FAQ’s on settlement agreements below.

What are the legal requirements for a Settlement Agreement?

To be legally binding, settlement agreements must comply with the following requirements:

  • It must be in writing.
  • It must relate to the particular complaint or particular proceedings about which there is a dispute.
  • An employee must have received independent legal advice from a solicitor or other appropriately qualified advisor, as to the terms and effect of the proposed agreement.
  • The employee’s advisor must be identified in the agreement and must have in force a professional indemnity policy to cover the risk of giving negligent advice.
  • The agreement must state that the above conditions relating to settlement agreements have been satisfied.

Can you exclude all potential future claims?

No, the employer should take note that they cannot use a settlement agreement to seek to exclude all potential future claims.

Personal injury claims or claims relating to future pension entitlement are likely to be expressly excluded.

Use of Settlement Agreement when making enhanced payments

Settlement Agreements are common where an employer is looking at making an enhanced payment to an employee and wishes to protect their position. After all, as an employer you wouldn’t wish to part with payments over and above what an employee is legally or contractually entitled to without the comfort that the employee has waived any claims which they may have regardless of whether those claims have merit or not.

What would a settlement agreement typically cover?

A settlement agreement will typically cover such key matters as:

  • The amount of any settlement payment (generally the first £30,000 of compensation payment (which includes any redundancy payment) is tax exempt) and when it is payable.
  • The claims which are being waived
  • What Reference (if any) is given
  • Confidentiality
  • Announcements regarding departure
  • Return of company property
  • Restrictive covenants

Does an employee need to take legal advice on the agreement?

Yes, for a settlement agreement to be binding, the individual who is entering into the agreement will be required to seek legal advice on the terms and effect of the agreement. It is common practice for the employer to contribute towards the employee’s cost.

What is a protected conversation?

Employers are able to have a ‘protected conversation’ in which to discuss an offer which an employer may wish to make to an employee without the risk that the ‘protected conversation’ is subsequently referred by the employee should a claim for unfair dismissal be issued later down the line.

For example, an employer may consider having a ‘protected conversation’ with an employee who is currently going through a redundancy, misconduct or capability process putting settlement terms to that employee rather than proceeding with / concluding that redundancy, misconduct or capability process.

The idea behind having a ‘protected conservation’ is for both parties to be able to have a frank discussion about the termination of an employee’s employment without that conversation being used later down the line in the employment tribunal.

Are there any caveats?

There are several caveats. A ‘protected conversation’ is not protected in certain claims, including claims for discrimination. In these circumstances, the parties may be able to discuss settlement of a dispute or anticipated dispute on ‘without prejudice basis’.

What is the difference between a Settlement Agreement and a COT3 Agreement?

In short both settle an employment dispute.

A COT3 agreement can only be agreed with the assistance of an ACAS Conciliation officer when there is a live dispute which ACAS have had an involvement in. A COT3 agreement tends to be a shorter document and the employee does not have to take independent legal advice on the COT3 agreement, unlike a settlement agreement. Whilst a COT3 can be agreed orally, it is strongly recommended that that COT3 is in written terms.

Where there is no live dispute before ACAS or the Employment Tribunal a settlement agreement would have to be used. It is for this reason that settlement agreements are far more common as a way of bringing about the termination of an employee’s employment or to settle potential disputes. The terms under a settlement agreement tend to be more onerous on an employee and therefore to the advantage of the employer, than under the terms of a COT3 terms.

What happens if a matter cannot be resolved?

If matters cannot be resolved between the parties, it may result in the employee commencing ACAS Early Conciliation and ultimately a claim against the employer in the employment tribunal. If a claim is pursued, then at any time before Judgment is given the parties may still seek to resolve the matter under the terms of a settlement agreement or a COT3 agreement.

Further advice

Our employment law team is recognised as one of the leading departments for employers in Essex and London by The Legal 500, an independent and definitive guide to the best law firms in the UK. If you require employment advice, then please do not hesitate to contact us on 01708 229 444.

We strongly encourage employers to take early-stage advice to reduce the risks of claims being made and to resolve matters quickly and in the most cost effective manner.

The above is meant to be only advice and is correct as of the time of posting. This article was written by Alex Pearce, Senior Associate in the Employment Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of January 2023.



Alex Pearce

Senior Associate

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Would you like to know more?

For help and advice, talk to a member of our team. They can advise on the best options in your matter.

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