Settlement Agreement Template

Key Facts:

• Legal mechanism: A settlement agreement is a statutory mechanism under section 203 of the Employment Rights Act 1996 that allows parties to settle employment claims.
• Formerly called: Prior to 29 July 2013, settlement agreements were known as "compromise agreements." The law changed under the Enterprise and Regulatory Reform Act 2013.
• Independent advice required: The employee must receive advice from a relevant independent adviser — a solicitor, barrister, certified trade union official, or authorised advice centre worker.
• Claims must be specified: Each claim being waived must be individually identified — a blanket waiver of "all claims" is not effective.
• Tax treatment: The first £30,000 of a termination payment (excluding contractual entitlements) may be paid free of income tax under section 401 of ITEPA 2003.
• Cannot waive everything: Settlement agreements cannot waive accrued pension rights, personal injury claims unknown at the date of signing, or rights to enforce the agreement itself.

Settlement agreements provide certainty, finality, and cost control for both parties.

Potential Consequences:

• Employment tribunal claims: Without a valid waiver, former employees can bring claims for unfair dismissal (compensation up to £115,115 or 52 weeks' pay), wrongful dismissal, discrimination (uncapped damages), and other statutory claims.
• Legal costs: Defending a tribunal claim typically costs £5,000–£30,000+ in legal fees, management time, and disruption.
• Reputational damage: Tribunal proceedings are public — published decisions can damage employer brand and recruitment.
• Ongoing uncertainty: Without settlement, an employee has up to 3 months less a day from the effective date of termination to bring most tribunal claims, and up to 6 years for breach of contract claims.
• Invalid agreement: A settlement agreement that does not meet the statutory requirements is void — meaning the employee can still bring claims despite signing.

A properly drafted settlement agreement provides a clean break and protection for both parties.

Complete Settlement Agreement Pack:

• ✓ Section 111A cover letter — "Without Prejudice" proposal letter to the employee, auto-populated with all key terms, financial summary, legal advice contribution, employee rights, and 10-day response window
• ✓ Settlement agreement — full agreement with all clauses below
• ✓ Schedule 1 — Adviser certificate — blank certificate for the employee's independent legal adviser to complete and sign

Settlement Agreement Clauses:

• ✓ Definitions and interpretation
• ✓ Termination of employment with selectable reason (redundancy, mutual, restructure, performance, grievance)
• ✓ Settlement payment with correct £30,000 tax-free threshold treatment
• ✓ Payment in lieu of notice (PILON)
• ✓ Accrued holiday pay
• ✓ Salary arrears and bonus provisions
• ✓ Employer contribution to legal fees
• ✓ Garden leave provisions (optional)
• ✓ Individually specified claims waiver (ERA 1996, Equality Act 2010, WTR 1998, TUPE 2006)
• ✓ Protected disclosure carve-out (whistleblowing rights preserved)
• ✓ Pension and personal injury carve-outs
• ✓ Independent legal adviser certificate
• ✓ Confidentiality clause (mutual or employee-only)
• ✓ Restrictive covenants continuation
• ✓ Agreed reference wording
• ✓ Company property return
• ✓ Non-derogatory statements clause
• ✓ Tax indemnity
• ✓ Entire agreement clause
• ✓ Counterparts clause
• ✓ Governing law (England and Wales)
• ✓ Proper execution block for employer, employee, and adviser

Related documents: Employers often also use our Employment Contract, NDA, and Performance Improvement Plan templates.

Avoid These Critical Errors:

• Blanket waiver wording: "All claims of any nature" is not effective under section 203. Each claim must relate to "particular complaints" — individually specified by statute and section number.
• No independent legal advice: Without advice from a relevant independent adviser, the agreement is void and the employee can still bring claims.
• Wrong tax treatment: PILON and holiday pay are subject to full tax and NI. Only the ex-gratia element benefits from the £30,000 exemption.
• Missing adviser certificate: The adviser must sign a certificate confirming they have advised, hold insurance, and are identified in the agreement.
• Forgetting pension carve-out: Accrued pension rights cannot be waived — the agreement must expressly exclude them.
• Overlooking personal injury: Claims for personal injury unknown to the employee at the date of signing must be carved out.
• No protected disclosure protection: Confidentiality clauses must not prevent the employee from making protected disclosures (whistleblowing).
• Using US templates: US-drafted "severance agreements" do not meet UK statutory requirements and are not effective under English law.

Our template addresses all of these issues with built-in legal safeguards.