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A Settlement Agreement (formerly known as a compromise agreement) is a legally binding contract that employers use to set out terms and conditions agreed upon by an employee to end an employment relationship or resolve a dispute. They usually involve an employee receiving a payment in return for giving up their rights to bring about an employment rights claim and other claims against the employer.

Our Employment team specialises in helping employees and employers understand their rights and get the best outcome for both parties.

Frequently asked questions about Settlement Agreements

  1. Does an employee have to sign a Settlement Agreement?

No. If the employee does not agree to a Settlement Agreement, they can negotiate the terms. A specialist solicitor can help to secure the best agreement possible for the employee and the employer. If the employee decides to negotiate the issues they should consider the amount of compensation being offered; whether the terms will affect their ability to get a new job; and the further costs of instructing a solicitor to conduct those negotiations as that will be additional work not covered in the Agreement.

  1. Why has the employee been asked to sign a Settlement Agreement?

The employer will have asked the employee to sign it to record their agreement following an employment issue or the ending of the employment relationship. It clarifies what the parties have agreed: the amount of money that the employee will receive; and the agreement that the employee will not pursue legal action against the employer. It is a legally binding agreement.

  1. Does the employee need to obtain legal advice to make a Settlement Agreement?

Yes. Obtaining expert advice to make an employment Settlement Agreement is a legal requirement. A qualified lawyer must review and sign it before it is deemed They must be reviewed and signed by a qualified lawyer before they can be deemed lawful. The legal adviser must be identified and insured. At Levi Solicitors LLP, we have solicitors and legal executives who specialise in this service.

  1. Is a Settlement Agreement the same as redundancy?

You can use a Settlement Agreement in a redundancy situation. However, they are not the same. A Settlement Agreement documents that an employee agrees to waive their rights to bring any legal action against their employer. On the other hand, redundancy does not waive an employee’s rights.

In a redundancy situation, an employee may choose to sign a Settlement Agreement rather than take a redundancy package as they could get more money. However, by signing one they would give up their right to make a claim for unfair dismissal against their employer.

  1. What happens if either party breaches the Settlement Agreement?

Parties can breach a Settlement Agreement in a number of ways. For example, an employee bringing a claim against an employer despite agreeing not to in the terms of an agreement, or an employer failing to pay an agreed sum of money. As it is a legal document, once breached, a claim can be brought to the courts for breach of contract.

  1. How much will a Settlement Agreement cost?

Employees should not be charged for signing Settlement Agreements. The employer usually covers the cost. The Agreement will set this out.

We will not charge an employee more than the contribution set out in the Agreement, unless we are also instructed to negotiate with the employer to make amendments. In those circumstances, we will advise the employee of the likely additional costs involved and likely timescales. In relation to acting for employers, we can agree to conduct work on a fixed fee basis. For further information on our costs, please see our Employment pricing page.

  1. Are Settlement Agreements tax free?

The amount of Settlement Agreement compensation an employee receives will determine whether it is tax free. Typically, the first £30,000 of payments made is tax free. However, any payments made for wages and holiday pay will be taxable as usual under the employment contract.


Levi Solicitors LLP has a specialist Employment team, that offers advice to employers and employees on Settlement Agreements. We offer an online service so that you do not need to physically attend our offices. Contact us today on 0800 988 7756 or use the enquiry form.