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A Settlement Agreement was previously known as a Compromise Agreement. It’s a legally binding agreement between you and your employer and usually allows for a severance payment by the employer in return for your agreement not to pursue any claims in a Tribunal or a Court. Your employer will usually require you to keep the terms (such as the settlement amount and the surrounding circumstances of your employment ending), confidential.

Have you received a Settlement Agreement?

Pilgrim Hope solicitors are experts in advising on Settlement Agreements.

What is a Settlement Agreement?

A Settlement Agreement (previously known as a Compromise Agreement) is a legally binding agreement between you and your employer setting out the terms upon which your employment relationship will come to an end.

Employers are prepared to offer Settlement Agreements in situations when they want to terminate a contract on terms mutually agreed with you.

As far as the employer is concerned the essential point of a Settlement Agreement is to ensure there is an effective clean break with no opportunity for you to take them to court or to a tribunal.

Termination Payment

The Settlement Agreement usually provides for a termination payment by the employer to you.

Legal Advice

A Settlement Agreement can only be recognised in law if a solicitor or a certified trade union adviser has signed it off.


Your employer is expected to pay a contribution towards your legal fees of between £350 and £750 (plus VAT) depending on the complexity of the issues. This amount is likely to cover all of your legal fees in any straightforward matter.

Pilgrim Hope Solicitors will advise you on the merits of your claim and the amount of money you would be likely to receive at an Employment Tribunal.

Tax Free?

The Settlement Agreement will include a full breakdown of payments due to you and also whether any sums will be paid free of tax. A payment of Up to £30,000 compensation can be paid without tax being deducted if it is an ex-gratia payment (compensatory rather than contractual payment).

Notice Payment

A Settlement Agreement will also deal with your notice payment if this is notice period is not going to be worked. If you have no contract or your contract does not contain a provision that refers to your employer being able to make a payment in lieu of notice (PILON), then your employer could pay your notice as a gross amount. There is no additional cost to your employer as this money would otherwise have been paid to HMRC.

Tax Indemnity

Pilgrim Hope Solicitors will check to make sure you receive the maximum sum in the most tax efficient way. However, it is normal for you to provide your employer the tax indemnity. For this reason you need to be advised as to what tax you should expect to pay if HMRC challenges the payments made to you under the Settlement Agreement.

Bonus or Commission

Any bonus or commission owed to you should be set out in the Settlement Agreement, and Pilgrim Hope Solicitors will check with you to ensure all contractual bonuses and commissions are paid in full.


We will advise you in relation to loss of pension, particularly if you have a final salary pension. Pension contributions should continue during your notice period unless your contract says otherwise.

If an arrangement is reached with your employer for a lump sum to be paid into your pension as part of the Settlement Agreement then you may be able to benefit from this being paid free of tax.

Medical or Life Insurance Schemes

Some medical and life insurance schemes will be a benefit that terminates on the last day of your employment, whilst there are other schemes which will allow you to remain in them for the period Up to which your employer has paid. You should establish whether or not the medical or life insurer will offer terms if you stay in the scheme as an individual once your contract is terminated.

Settlement Payments

Pilgrim Hope Solicitors will consider the sums offered to you in the Settlement Agreement and advise you if it is a good deal. We will advise you as to whether or not you have a strong claim were you to take your case to the employment tribunal or court, and give you an idea of what you would be awarded if you were to pursue your claim.

Where the amounts offered are satisfactory, or where you instruct us to proceed despite the fact you could potentially obtain more in an employment tribunal or court, a solicitor At Pilgrim Hope Solicitors will sign off the Settlement Agreement without delay to ensure you receive the settlement payments.


It is a good idea to ask that an agreed employment reference is attached to the Settlement Agreement with the clause employer cannot communicate anything contrary to this agreed reference.

Restrictive Covenants and Confidentiality

A Settlement Agreement may reaffirm post termination restrictive covenants that are contained within your contract. Pilgrim Hope solicitors will check that your employer has not increased the scope of these restrictive covenants.

Confidentiality is an extremely important part of any Settlement Agreement, but sometimes the scope of the confidentiality clause needs to be reduced to enable you to speak to those closest to you, such as your immediate family. Furthermore, the confidentiality clause can be reduced in scope to enable you to speak with future employers about the circumstances of your departure