How to Write a Settlement Agreement
Write a settlement agreement by setting out the termination terms, the compensation amount, a waiver of employment claims, tax treatment, confidentiality provisions, and an agreed reference. The employee must receive independent legal advice for the agreement to be valid.
Last updated: February 2025
Step-by-Step Guide
Determine the terms of the settlement
Agree the termination date, compensation amount, treatment of outstanding holiday, bonus, and benefits, and any post-termination restrictions.
- •The first £30,000 of a genuine termination payment is tax-free under section 401 ITEPA 2003.
Draft the agreement
Include the parties, termination date, payments, waiver of claims (listing each specific claim type), confidentiality, non-derogatory statements, agreed reference, and return of property.
- •The waiver must reference specific statutory claims to be effective.
List the claims being settled
The agreement must identify the specific claims being waived, such as unfair dismissal, discrimination, and breach of contract. Generic waivers are not effective for statutory claims.
- •Include claims under the Equality Act 2010, Employment Rights Act 1996, and any other relevant legislation.
Arrange independent legal advice
The employee must receive advice from a relevant independent adviser (usually a solicitor) for the agreement to be valid. The employer typically contributes to the cost.
- •A contribution of £350-£500 plus VAT towards legal fees is standard.
Execute the agreement
Both parties sign, and the adviser signs the certificate confirming they have given advice on the terms and effect of the agreement.
- •The adviser's certificate is a statutory requirement; without it the agreement is not valid.
Legal Requirements
Settlement agreements are governed by section 203 of the Employment Rights Act 1996 and equivalent provisions in other employment statutes. To be valid, the agreement must be in writing, relate to a particular complaint or proceedings, the employee must have received independent legal advice, the adviser must have insurance, and the agreement must identify the adviser.
Common Mistakes
Template / Example
When to Get a Solicitor
Always required by law. The employee must have independent legal advice, and the employer should have their own solicitor draft or review the agreement.
FAQ
How much compensation is typically offered in a settlement agreement?
There is no fixed formula. Common starting points are one to six months' salary depending on the circumstances, the employee's length of service, and the strength of any potential claims.
Is a settlement agreement the same as a compromise agreement?
Yes. The term was changed from 'compromise agreement' to 'settlement agreement' by the Enterprise and Regulatory Reform Act 2013, but the legal requirements are the same.
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