Skip to content
Leamington Spa 01926 422 101     Coventry 02476 229 582

A Guide to Settlement Agreements (Formerly Compromise Agreement)

This is a note detailing some of the issues involved in and the steps to be taken upon receipt of a settlement agreement. A settlement agreement is between an employer and employee. When it has been finalised, the agreement provides a ‘clean break’ with no opportunity for any further action to be taken against the employer.  The final payment made will be in full and final settlement of any claims.

Employers will contribute towards the costs of a Solicitor in relation to the reviewing and execution of the settlement agreement. In a lot of cases it is preferential and indeed advisable to obtain legal advice before entering into negotiations on the package, in advance of an initial agreement being prepared. In our experience we have found that those who have obtained legal advice early are in a much better position to negotiate a more favorable package. The cost of this advice will not be paid for by your employer but in our view can be extremely worthwhile and make the whole process more informed and as a result, less stressful.

For a settlement agreement to be valid:

  • It must be in writing, and relate to the particular proceedings;
  • The employee or worker must have received independent advice on the terms and effect of the agreement;
  • There must be in force a contract of insurance or indemnity to cover a possible claim by the Employee or worker in the event the advice is incorrect;
  • The agreement must identify the adviser; and
  • The agreement must confirm that the relevant statutory conditions have been satisfied

Tax Indemnity

The first £30,000 of the compensation payment for loss of employment is usually free of tax and National Insurance deductions and the settlement agreement will need to show this.

Any redundancy payments up to £30,000 (both contractual and statutory) are usually tax-free. Your notice period may also be included in the tax free sum but only if there is no Payment in Lieu of Notice clause in your contract of employment. Other benefits such as use of a mobile phone or company car are usually tax free. If you are not working your full notice and being paid “in lieu”, this should clearly be stated in the settlement agreement.

This tax free allowance should not only benefit companies but may also be used to the employee’s advantage to achieve a larger final payment sum.

You should always seek independent accountancy advice in respect of all payments which are to be received, in advance of execution of the agreement.

Termination Payment

You will always find such a clause within a settlement agreement.

Payments made under the heading of termination payment are made in consideration of this agreement, the employee agrees to indemnify the company against all other taxes and national insurance contributions in respect of the payments and benefits provided, or to be provided, pursuant to the settlement agreement, and all costs, claims, expenses, proceedings, penalties and interest incurred by the company that arise out of or in connection with any liability to pay tax or national insurance contributions in respect of such payments and benefits.

Restrictive Covenants

On termination of a contract of employment, it is likely that the employer/company will seek to reinstate any restrictive covenants which have become unenforceable because of the termination circumstances or seek to include new restrictive covenants. If this is the case it is possible to negotiate a payment in respect of these covenants. Additionally you may wish to re negotiate a variation or waiver of existing covenants to make them less onerous.

Exclusion of all claims

A settlement agreement may restrict your right to bring any known personal injury claims up to the date of the agreement.  There will be a clause in all settlement agreements stating that the agreement is in full and final settlement of all claims. It is important that this only deals with claims that arise out of the contract of employment and its termination, and that all other claims such as personal injury and accrued pension benefit claims are not settled under this agreement.  The agreement may refer to all known or unknown claims; however this is likely to be ineffective as it is unacceptable to settle an unknown claim. You should make your solicitor aware of any unpaid claims that you have against the company.

Return of Company property

This is a common clause in all settlement agreements and is rarely an issue. If you believe that there may be an issue with the company’s attitude towards the return of its property, it is advisable to draw up an itemised list.

Bonus payments/holiday entitlement

If you are owed a bonus or have accrued holidays; details should be included within the agreement. Any payment in relation to accrued holidays will be taxable.


The employee should not do or say anything to bring the company/employer into disrepute.

Settlement agreements usually contain clauses relating to confidentiality whereby parties agree to keep the agreement details confidential and not to disclose its details to third parties. Any provision that attempts to prevent protected disclosures is unenforceable; the settlement agreement should not unduly restrict you from talking about the reason for your departure with others, for example, potential employers.


A clause providing for a written job reference should be included within the settlement agreement with a clause that your employer will not provide an unfavorable reference. The clause should state that they will only provide the agreed reference and will not, at any later stage either orally or in writing move away from the essence of the agreed reference.


This article was last modified on 16th June 2015 and was correct as of this date. However for expert advice in connection with the matter, please contact out employment law department on 02476229582 or emails

Back To Top