Settlement Agreements: The Legal Requirements That Make Them Valid
A settlement agreement that does not meet strict legal requirements is not binding. Here is what must be in it, what independent legal advice means, and when an agreement can be challenged.
schedule 7 min readperson Eugene Pienaar, Solicitor (non-practising)
What a Settlement Agreement Is
A settlement agreement -- formerly called a compromise agreement -- is a legally binding contract between an employer and an employee in which the employee agrees to waive their right to bring specified employment tribunal claims in exchange for a financial payment and usually other terms such as an agreed reference. Unlike most contracts, a settlement agreement that meets the statutory requirements in section 203 of the Employment Rights Act 1996 and section 147 of the Equality Act 2010 is enforceable even though it waives statutory rights that would otherwise be inalienable.
This is why the legal requirements for validity are strict. Parliament decided that employees could waive these rights -- but only with proper protection. Those protections are the mandatory requirements set out below.
The Five Requirements for a Valid Settlement Agreement
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The complete step-by-step guide: Settlement Agreement -- What You Must Check.
First, the agreement must be in writing. A verbal agreement to settle employment claims, however clearly made, is not a valid settlement agreement for the purposes of section 203 ERA 1996. It must be documented.
Second, the agreement must relate to a particular complaint or particular proceedings. A settlement agreement that purports to waive all employment claims, past and future, without identifying the specific complaints being settled, is not valid. The agreement must identify the specific claims -- unfair dismissal, discrimination, wrongful dismissal, or whatever is relevant -- being compromised.
Third, the employee must have received advice from a relevant independent adviser on the terms and effect of the agreement. This is the most important requirement. The adviser must be independent -- they cannot be employed by or acting for the employer. They must advise on the terms and effect of the agreement, meaning the employee must understand what they are waiving and what they are receiving. The adviser must hold a current contract of insurance or professional indemnity insurance.
Fourth, the agreement must identify the adviser. The specific individual, their firm, and their qualification must be stated.
Fifth, the agreement must state that the conditions regulating settlement agreements have been satisfied. This is usually a standard clause in any professionally drafted agreement.
What Independent Legal Advice Means in Practice
The independent legal advice requirement is routinely satisfied by the employer paying a fixed contribution -- typically £500 to £750 plus VAT -- towards the employee's legal fees for advice on the agreement. The employee chooses their own solicitor. The solicitor advises on the terms, explains what claims are being waived and what they might be worth, and signs the certificate confirming advice has been given.
What the solicitor cannot do -- but sometimes does not adequately do -- is properly advise on whether the settlement figure is adequate given the strength of the underlying claims. You are entitled to ask your solicitor what your claims might be worth and whether the offer is reasonable. If your solicitor signs the certificate without explaining what you are giving up, that is a failure of professional duty, not a problem with the agreement itself.
When a Settlement Agreement Can Be Challenged
A validly executed settlement agreement is very difficult to challenge. However, there are circumstances in which it can be set aside. Misrepresentation: if the employer made false statements that induced you to sign. Duress: if you were under improper pressure -- threats, very short deadlines without adequate time for advice, or coercion. Failure to meet the statutory requirements: if the adviser was not genuinely independent, or the agreement does not identify the specific claims. Failure of consideration: if the employer has not paid what was promised.
The without prejudice rule protects pre-agreement negotiations from being referred to in tribunal proceedings. However, that protection can be lost if there was improper conduct -- threats, harassment, or unambiguous impropriety -- during the negotiation. If you were pressured into signing, the without prejudice label does not automatically protect the employer.
Before You Sign
Take your time. Most employers offer a deadline for signing but this is often negotiable. Read every clause. Identify which specific claims are being waived -- if the list includes claims you did not know you had, that is useful information. Ask your solicitor what those claims might be worth. Ask whether the financial payment is taxable -- the first £30,000 of compensation is usually tax-free but other elements may not be. Ask whether the reference is adequate. Ask whether there are any restrictive covenants limiting your future employment. Sign only when you understand fully what you are agreeing to.
Educational purposes only. This article is not legal advice and does not create a solicitor-client relationship. If your situation requires legal advice, consult a qualified solicitor or visit equaljustice.legal.