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Compromise or Settlement Agreements


A s a general rule it is not possible for an employee to contract out of his/her statutory rights. Settlement agreements are an exception in that they offer a way to terminate the employment contract by mutual agreement.

A settlement agreement is in effect a voluntary agreement. It is also a legally binding document whereby an individual waives his/her employment rights and the right to pursue legal action against his/her employer.

Before signing is necessary to first seek independent legal advice from a relevant advisor, the cost of which is generally borne by the employer. Failure to do so will mean that the agreement is not valid.

Once signed an employee cannot take legal action in the Employment Tribunal on any right referred to in the agreement.

The only rights which cannot be signed away are pension rights, the employer’s failure to consult in collective redundancy and latent personal injury claims.

 Things to consider

  • Your rights upon termination, the right not to be unfairly dismissed, not to be discriminated against and so on.
  • The financial settlement, ex-gratia payment or any other payments arising upon termination
  • Taxation, generally compensation for loss of office is exempt from tax up to £30,000. Payments with in lieu of notice, accrued holidays are taxable in the usual manner.
  • Pensions
  • Reference which can be agreed
  • Confidentiality clauses
  • Restrictive covenants


The ACAS code of Practice on Settlement Agreements came into effect in July 2013. Failure to follow the code and its recommendations will not necessarily have an effect  on the compensatory award but will be taken into account and may lead to an adverse finding by the Employment Tribunal.

The Code recommends the following:

  • 10 days for the parties to consider the terms of the agreements and seek legal advice unless otherwise agreed.
  • As a matter of best practice to allow the employee to be accompanied to the pre- termination meeting by a trade union official or work colleague.
  • An employer or employee can propose a settlement agreement before the initiation of the disciplinary or any other formal procedure.
  • Pre- termination discussions/negotiations are generally inadmissible as evidence during the proceedings in the Employment Tribunal.  However, this rule will not apply in relation to anything said or done which the tribunal may consider ”improper behavior” and will apply to the extent that the tribunal considers “just”. See ACAS Code of Practice for examples of improper behavior.