What is a settlement agreement in the UK?

A settlement agreement (formerly a 'compromise agreement') is a legally binding contract between an employer and employee. In exchange for a financial payment, you waive the right to bring — or continue — employment claims such as unfair dismissal, discrimination, or unlawful deduction from wages. Once signed, the agreed claims are settled permanently.

For the agreement to be legally valid under the Employment Rights Act 1996 (s.203), it must be in writing, it must relate to a specific complaint or proceeding, and you must have received independent legal advice from a qualified adviser — typically a solicitor, barrister, trade union rep, or CAB adviser — who holds professional indemnity insurance. Your employer will normally pay a contribution of £500–£1,500 towards your legal fees.

Settlement discussions take place under 'without prejudice' privilege, meaning they cannot normally be referred to in Tribunal proceedings if negotiations break down. You are never obliged to accept an offer or sign the agreement.