Settlement (Compromise) Agreements – what you need to know

Guest Author, Kevin Poulter is a Senior Associate in the employment department of London firm Bircham Dyson Bell LLP


A Settlement Agreement (formerly known as a Compromise Agreement) is a contract between an employer and an employee terminating the employment relationship. They provide an employer with certainty that a claim will not be brought against it by the employee through the Tribunals and Courts. For employees, a Settlement Agreement will typically provide something more by way of compensation than the employee might otherwise be entitled to, such as a financial payment or some other non-financial incentive such as a detailed reference.

Settlement Agreements are increasingly common. Just because an employer offers a Settlement Agreement does not necessarily mean they have done anything wrong. Agreements like this are used for certainty and completeness and should not be viewed defensively. Of course, there are exceptions and agreements can be entered into or offered when the employment has broken down beyond repair or used as a solution to effect a mutually agreeable termination (such as if someone is retiring or moving to another organisation).

Settlement Agreements – and any payment under them – are almost always made without any admission by the employer as to liability or blame.

Like all contracts, Settlement Agreements can vary in length and scope, according to the seniority of the employee, the type of organisation and any risks associated with termination.  They can be anything from one side of paper to 50 pages or more.  However, there are key terms which are typical to all such agreements.

Key settlement terms

You will always expect to find details of the employee and the employer; the termination date; notice and/or notice pay; legal advice and fees; the waiver of claims; reference details and; any announcement to other employees and/or customers, clients and suppliers.

Compensation amount: This will inevitably vary between every situation. The compensation or settlement payment will often include an ex gratia amount – something which isn’t required by law or by contract to be paid to the employee.  This is in effect what the employer is paying to reduce their risk of a claim.

Tax indemnity: A part or the whole of a compensation or settlement payment may be paid tax free.  If there is an element of redundancy pay or an ex gratia payment included within the compensation amount and it is paid as ‘compensation for loss of employment’, up to £30,000 may be paid tax free.  Where a payment is made, the employer will typically include an indemnity clause, meaning that if HMRC pursue the employer for any tax which it believes it should have paid, that liability will be passed on to the employee.  If the payment is a genuine compensation payment (and not, for example, a contractual entitlement to a bonus or notice pay) there should not be any risk, however the clause is a precautionary measure.  You can also discuss with your advisor the various ways of structuring a payment so as to minimise your exposure to tax.

Restrictive covenants: You may already have some restrictions in your contract of employment which will continue beyond the termination of your employment.  These will often include restrictions on where you can work for a period after termination, what type of company you may work for and/or any geographical location which is prohibited.  You will often be reminded of those restrictions or your employer may include new restrictions in the agreement as part of the ‘deal’.  You should review these carefully, particularly if leaving to commence employment with a competitor organisation.

Legal advice:  You must seek legal advice as to the terms of the Agreement.  This will usually be in a short meeting with a solicitor or other legal advisor of your choice.  There are some criteria that the advisor must meet to be suitable for these purposes.  Although there is no obligation on your employer to provide any contribution towards your legal fees, it is usual to include a nominal contribution of at least £300 plus VAT.  If the Agreement is more complex, this might be increased.  Your advisor will also be required to confirm in writing that they have provided you with the necessary advice.

Confidentiality: The terms of the Agreement and the circumstances relating to it will almost always be subject to a confidentiality clause, with very few exceptions.  This is likely to be taken very seriously by your employer who will want to protect this information, specifically in relation to payment terms.

The terms of any Settlement Agreement are negotiable, however, the extent of how flexible the employer may be will depend on the particular circumstances leading to it.  Your legal advisor will be able to assist you when considering this.

Dealing with the termination of your employment, whatever the reason, can be difficult and emotional. Professional advice is essential when you might not be thinking clearly. Settlement Agreements may seem very insincere, but they can prove to be a valuable method of dealing with the necessary formalities at the end of the employment relationship. It also seems likely that they are here to stay.


Kevin Poulter is a Senior Associate in the employment department of London firm Bircham Dyson Bell LLP.  If you have received or may be offered a Settlement Agreement or require any assistance with negotiating or preparing an Agreement, you may contact him at [email protected] or by telephone on 020 7227 7000. You can follow him on Twitter @kevinpoulter or visit his website  



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