Settlement Agreement Employer Guide | When, How & How Much
A comprehensive employer guide to settlement agreements. Covers when to offer one, protected conversations, without prejudice, what goes in the agreement, independent legal advice, tax treatment, the £30k threshold, reaffirmation clauses, NHS settlement agreements, resignation settlement agreements, and what makes a settlement agreement unenforceable. ERA 2025 updated.
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Bolton, Manchester, North WestA settlement agreement is a legally binding contract between employer and employee that ends the employment relationship on agreed terms in exchange for the employee waiving their right to bring tribunal claims. Settlement agreements are the cleanest, fastest, and often cheapest way for an employer to exit someone from the business when the formal process is risky, slow, or disproportionate. The employer pays a sum (typically 1–6 months’ salary), contributes to the employee’s independent legal advice, and in return gets a full waiver of claims including unfair dismissal, discrimination, and breach of contract. From January 2027 under ERA 2025, unfair dismissal protection after six months of service and the removal of the compensation cap make settlement agreements more attractive than ever for North West employers who want a clean exit without tribunal risk.
When Should an Employer Offer a Settlement Agreement?
A settlement agreement is not a last resort. For many employers, it is the most commercially sensible route to ending an employment relationship that is not working. The formal disciplinary or capability process under the Acas Code exists, but it takes weeks or months, absorbs management time, and still carries tribunal risk at the end. A settlement agreement compresses that into a single negotiation.
The most common scenarios where employers use a settlement agreement are: performance issues where the formal capability process would be lengthy and the outcome is predictable; relationship breakdown between the employee and their manager or team; redundancy situations where the employer wants to avoid the consultation process for a single role; mutual agreement to part ways where both sides recognise the situation is not working; and situations where the employer has identified a procedural flaw in an earlier process and wants to resolve it before it becomes a tribunal claim.
Settlement agreements are particularly valuable for North West SMEs who do not have in-house legal teams. The cost of a settlement agreement is predictable and finite. The cost of a tribunal claim is neither. A CIPD-qualified HR consultant can advise on whether a settlement agreement is the right route for your situation and what a reasonable offer looks like.
Protected Conversations and Section 111A
Section 111A of the Employment Rights Act 1996 allows an employer to have a pre-termination negotiation with an employee without that conversation being admissible in an ordinary unfair dismissal claim. This is what is meant by a protected conversation. The employer can say: we think this is not working, and we would like to offer you a settlement agreement to leave on agreed terms.
The protection under s111A is not absolute. It does not apply if there has been improper behaviour by the employer, such as bullying, harassment, discrimination, or putting undue pressure on the employee to accept. It also does not protect against discrimination claims, whistleblowing claims, or automatic unfair dismissal claims. If the employer has behaved improperly, the entire conversation becomes admissible at tribunal.
Separately, the without prejudice rule protects settlement discussions where there is an existing dispute between the parties. Without prejudice requires a genuine dispute to already exist. Section 111A does not: it allows the employer to initiate the conversation even where there is no dispute. Most employers offering a settlement agreement should rely on both protections where possible. If in doubt, take advice from an HR consultant before initiating the conversation.
What Goes in a Settlement Agreement?
A settlement agreement must be in writing, must relate to a particular complaint or proceedings, and the employee must have received independent legal advice on the terms and effect of the agreement. Beyond those statutory requirements, a typical employer settlement agreement includes the following terms:
Termination payment
The sum the employer pays in return for the waiver of claims. Usually expressed as an ex-gratia payment. The first £30,000 is tax-free under s401 ITEPA 2003. Payments in lieu of notice (PILN) are subject to tax and NI under the post-employment notice pay (PENP) rules regardless of how they are labelled in the settlement agreement.
Waiver of claims
The employee agrees to waive all employment claims arising from the employment or its termination. The settlement agreement must list the specific statutory claims being waived, including unfair dismissal, discrimination under the Equality Act 2010, breach of contract, unlawful deduction from wages, and any other relevant claims. A general waiver without listing specific claims may not be enforceable.
Reference
An agreed reference is standard in most settlement agreements. The employer agrees to provide a reference in agreed terms and not to deviate from it. This gives the employee certainty about what future employers will be told and gives the employer certainty that the reference obligation is defined and limited.
Confidentiality
Most settlement agreements include a confidentiality clause preventing both parties from disclosing the terms. Under ERA 2025, confidentiality clauses in settlement agreements cannot prevent the employee from disclosing information about sexual harassment. Employers must ensure their settlement agreement templates are updated to reflect this restriction.
Reaffirmation clause
A reaffirmation settlement agreement clause requires the employee to confirm, shortly before or on the termination date, that no new claims have arisen since the agreement was signed. This protects the employer against events that occur between signing and the actual leaving date. Reaffirmation clauses are increasingly common and are recommended for any settlement agreement where there is a gap between signing and termination.
Restrictive covenants
The settlement agreement may restate or vary existing post-termination restrictions such as non-compete, non-solicitation, and non-dealing covenants. If the employer wants to enforce restrictive covenants, the settlement agreement should expressly confirm they survive termination.
Independent Legal Advice: The Statutory Requirement
A settlement agreement is not legally binding unless the employee has received independent legal advice from a qualified lawyer, a certified trade union official, or an advice centre worker authorised to give such advice. The adviser must be identified by name in the settlement agreement, and their advice must cover the terms and effect of the agreement, particularly its effect on the employee’s ability to pursue tribunal claims.
The employer is expected to contribute to the cost of the employee’s independent legal advice. The typical employer contribution is £350–£500 plus VAT, though this can be higher for complex settlement agreements involving senior employees, multiple claims, or large payments. The contribution is usually paid directly to the employee’s solicitor on completion. It is not part of the termination payment and is not subject to the £30,000 tax-free threshold.
Without independent legal advice, the settlement agreement is unenforceable. The employer cannot rely on the waiver of claims and the employee retains the right to bring a tribunal claim. This is the single most common reason settlement agreements fail. Employers should build the legal contribution into their settlement agreement budget from the outset.
Tax Treatment of Settlement Agreements and the £30k Threshold
The first £30,000 of a genuine termination payment under a settlement agreement is tax-free under section 401 of the Income Tax (Earnings and Pensions) Act 2003. Payments above £30,000 are subject to income tax at the employee’s marginal rate. Employer National Insurance is payable on any amount exceeding £30,000.
Critically, not everything in a settlement agreement falls within the £30,000 exemption. Payments in lieu of notice are taxable as earnings under the post-employment notice pay (PENP) rules, regardless of whether the employment contract contains a PILN clause. Holiday pay, bonus payments, and any other contractual entitlements are also taxable as earnings. Only the genuine ex-gratia element of the settlement agreement qualifies for the £30,000 exemption.
Employers must calculate PENP correctly in every settlement agreement. Getting the tax treatment wrong exposes the employer to HMRC enquiries and potential penalties. A North West HR consultant or employment lawyer can advise on the correct tax treatment for your settlement agreement.
Settlement Agreements in the NHS and Public Sector
Settlement agreements in the NHS carry additional governance requirements that do not apply in the private sector. NHS employers must comply with Treasury Managing Public Money guidance, which requires settlement agreement payments to represent value for money and to be defensible under public scrutiny. For NHS staff at Band 8a and above, or for any settlement agreement exceeding £100,000, additional approval processes apply and may require sign-off from the Trust or ICB remuneration committee.
NHS settlement agreements involving very large payments or senior clinicians may require Ministerial Direction. The 2023 DHSC guidance on confidentiality clauses in NHS settlement agreements restricts the use of non-disclosure provisions and requires that settlement agreements do not prevent the employee from raising patient safety concerns, cooperating with regulators, or making protected disclosures under whistleblowing legislation.
NHS settlement agreements are also subject to Freedom of Information requests. While the specific terms may be exempt under the commercial interests exemption, the existence and approximate value of a settlement agreement may be disclosable. NHS employers should assume that the fact of a settlement agreement will become public and draft accordingly. Clinical staff settlement agreements must address professional registration implications and any outstanding fitness-to-practise matters.
Public sector employers outside the NHS face similar scrutiny under Managing Public Money principles. Local authorities, government agencies, and publicly funded bodies should ensure settlement agreements are approved at the appropriate governance level and that the business case for the settlement agreement is documented.
Resignation Settlement Agreements
A resignation settlement agreement occurs when the employee initiates the conversation. The employee may offer to resign if the employer agrees to certain terms: a payment, an agreed reference, or the waiver of restrictive covenants. This is sometimes called an employee-initiated settlement agreement or an exit by mutual consent.
Resignation settlement agreements are common where the employee is unhappy, has raised a grievance, or believes they have grounds for a constructive dismissal claim. From the employer’s perspective, a resignation settlement agreement can be attractive: the employee leaves voluntarily, the employer avoids the cost and risk of defending a tribunal claim, and the terms are agreed and final.
The same legal requirements apply to a resignation settlement agreement as to any other: it must be in writing, the employee must receive independent legal advice, and the agreement must identify the adviser. The employer should not assume that because the employee initiated the conversation, the agreement is less formal or the legal requirements are relaxed.
Timescales and the 10-Day Consideration Period
The Acas Code of Practice on Settlement Agreements recommends that employers give the employee at least 10 calendar days to consider the offer and take independent legal advice. This is not a strict legal requirement, but failing to allow adequate consideration time can undermine the voluntary nature of the agreement and make it harder for the employer to rely on the waiver of claims.
A typical settlement agreement timeline from initial conversation to signed agreement is 2–4 weeks. The employer makes the offer, the employee takes legal advice, there may be a round of negotiation on the terms or the amount, and the agreement is signed. Complex settlement agreements involving senior employees, multiple claims, or deferred payments may take longer.
The employer should not pressure the employee to sign quickly. An employee who signs under pressure may later argue the agreement was not truly voluntary. Equally, the employer is entitled to set a reasonable deadline for acceptance and to withdraw the offer if it is not accepted within that period. Most settlement agreements include a longstop date after which the offer lapses.
What Makes a Settlement Agreement Unenforceable?
A settlement agreement is unenforceable if any of the statutory requirements are not met. The most common grounds for a settlement agreement being found unenforceable are: the employee did not receive independent legal advice from a qualified adviser; the agreement is not in writing; the agreement does not identify the adviser by name; the agreement purports to waive claims that had not yet arisen at the date of signing; or the employee was subjected to undue pressure, duress, or misrepresentation.
Employers should also ensure the settlement agreement correctly identifies all the claims being waived. A generic waiver may not cover claims the employee did not know about at the time of signing. Best practice is to list every potential claim explicitly, including any Equality Act 2010 claims, whistleblowing claims, and breach of contract claims.
If a settlement agreement is found unenforceable, the employer loses the protection of the waiver and the employee can bring their original tribunal claims as if the agreement had never existed. The employer has still paid the termination sum but has no protection from it. This is why independent legal advice for the employee, paid for by the employer, is an investment in the enforceability of the settlement agreement, not just a cost.
ERA 2025: What Changes for Settlement Agreements
Unfair dismissal protection after 6 months of service. Settlement agreements become more attractive for short-service exits where the employer wants a clean break without tribunal risk from day-one rights.
Tribunal claim window doubles from 3 to 6 months. The wider window for bringing claims makes the clean exit that a settlement agreement provides even more valuable for employers.
Compensation cap removed. With no upper limit on tribunal awards, the cost of a settlement agreement looks increasingly reasonable compared to the potential cost of losing at tribunal.
NDA restrictions in harassment cases. Settlement agreements cannot prevent the employee from disclosing information about sexual harassment. Employers must update their settlement agreement templates.
DaisyHR helps North West employers draft settlement agreements that are ERA 2025 compliant, commercially sensible, and enforceable.
Read our full ERA 2025 guide for employersFrequently Asked Questions
When you want a clean exit without tribunal risk. Common scenarios include performance issues, relationship breakdown, redundancy, and mutual agreement to part ways. A settlement agreement is often cheaper and faster than the formal process, especially for North West SMEs without in-house legal teams.
Typically 1–6 months’ gross salary depending on circumstances, length of service, tribunal risk, and the strength of the employee’s potential claims. The first £30,000 of a genuine termination payment is tax-free. The employer also pays a contribution towards the employee’s legal advice, usually £350–£500 plus VAT.
Yes, provided the statutory requirements are met: the agreement is in writing, the employee has received independent legal advice from a qualified adviser, and the adviser is identified in the agreement. Without all three, the settlement agreement is unenforceable and the employee retains the right to bring tribunal claims.
Yes. A settlement agreement must be voluntary. If the employee refuses, the employer continues with the formal process. Protected conversations under s111A mean the offer generally cannot be used against the employer at tribunal, provided there was no improper behaviour.
The employer is expected to contribute. The typical contribution is £350–£500 plus VAT, paid directly to the employee’s solicitor. This is not part of the termination payment. It is the employer’s investment in making the settlement agreement enforceable.
A reaffirmation clause requires the employee to confirm, on or shortly before the termination date, that no further claims have arisen since the settlement agreement was signed. It protects the employer against events occurring between signing and the actual leaving date. Increasingly standard in settlement agreements and recommended for any agreement with a gap between signing and exit.
The first £30,000 of a genuine ex-gratia termination payment is tax-free. Payments above £30,000 are subject to income tax and employer NI. Notice pay is taxable under PENP rules regardless of how it is described in the settlement agreement. Holiday pay, bonuses, and contractual entitlements are taxable as earnings.
Yes. NHS settlement agreements must comply with Treasury Managing Public Money guidance, may require remuneration committee approval for senior staff or large payments, are subject to FOI requests, and are restricted in their use of confidentiality clauses under 2023 DHSC guidance. Public sector employers face similar governance requirements.
Yes. A resignation settlement agreement is where the employee initiates the exit and negotiates terms. This is common where the employee is unhappy, has raised a grievance, or believes they have grounds for constructive dismissal. The same legal requirements apply as for any settlement agreement.
Typically 2–4 weeks from initial conversation to signed agreement. The Acas Code recommends a minimum 10 calendar days for the employee to consider the offer and take legal advice. Complex settlement agreements involving senior employees or multiple claims may take longer. The employer can set a reasonable deadline for acceptance.
Get Dismissal Advice From a North West HR Consultant
Dismissal is the area where North West SMEs face the most tribunal risk, and where getting advice early makes the biggest difference to the outcome. Book a free 30-minute consultation. We will assess the situation, tell you what the risk looks like and advise on the right course of action before you make any final decision.
Dismissal advice for employers across Bolton, Manchester, Wigan, Warrington, Salford, Stockport, Bury, Rochdale, Preston, Lancaster, Cheshire and the wider North West. · Last reviewed: March 2026