A Jamie HR manager's guide

The manager's guide to settlement agreements

A practical guide for managers and small businesses on settlement agreements: what they are, the independent advice requirement, protected conversations, what they typically contain, the tax treatment of termination payments, and the Employment Rights Act 2025 change to confidentiality clauses.
Legally binding waiver
Independent advice required
Tax treatment explained

A settlement agreement only waives an employee's claims if the law's conditions are met.

This guide sets out what a settlement agreement is, the legal basis for it, and the independent advice condition that makes it valid. It covers protected conversations, what an agreement typically contains, how termination payments are taxed, and the Employment Rights Act 2025 change affecting confidentiality clauses on harassment and discrimination.

What's inside
What is a settlement agreement?3
Why settlement agreements are used4
Independent legal advice: a condition for validity5
Protected conversations and without prejudice discussions6
The ACAS Code: process and timing7
What a settlement agreement typically contains8
Confidentiality clauses: scope and limits9
Tax treatment of termination payments10
NDA reform: the Employment Rights Act 2025 change11
Getting settlement agreements right12
How Jamie HR helps13

What is a settlement agreement?

A settlement agreement is a legally binding contract, not an informal understanding.
  • A settlement agreement is a legally binding contract in which an employee agrees not to pursue specified employment claims against their employer, usually in return for a payment, according to ACAS guidance.
  • Most statutory employment claims are waived under section 203 of the Employment Rights Act 1996; discrimination claims under the Equality Act 2010 are waived through a parallel route in section 147 of that Act.
  • Both Acts set the same core conditions for a valid waiver: the agreement must be in writing, relate to the particular complaint, and the employee must have received advice from a relevant independent adviser.
  • A settlement agreement can end the employment relationship, or it can resolve a workplace dispute while employment continues, according to ACAS guidance.

Why settlement agreements are used

ACAS guidance sets out the situations in which a settlement agreement is typically put forward.
  • As part of a redundancy process, alongside the employee's statutory or contractual redundancy entitlement.
  • To resolve an existing workplace dispute or a claim already lodged with an employment tribunal.
  • To agree an exit outside a disciplinary or grievance process, where both parties prefer a negotiated outcome to a formal procedure.
  • To settle a dispute without ending employment, for example following a disagreement between colleagues, according to ACAS.
Manager tip
Before proposing a settlement agreement, consider whether the underlying issue could be resolved through your normal grievance, disciplinary or performance process instead.

Independent legal advice: a condition for validity

Both Acts make the employee's independent advice a condition of a valid waiver, not an optional extra.
  • The employee must receive advice from a 'relevant independent adviser' on the terms and effect of the agreement, including its effect on their ability to pursue a claim.
  • A relevant independent adviser is a qualified lawyer, a certified and authorised trade union official, or a certified worker or volunteer at an advice centre.
  • An adviser employed by, or acting for, the employer cannot act as the employee's independent adviser under either Act.
  • The adviser must hold a contract of insurance, or equivalent professional indemnity cover, against a claim by the employee arising from the advice.
  • The agreement itself must identify the adviser and confirm that these conditions have been met.
Watch out
A settlement agreement that does not meet these conditions will not validly waive the employee's statutory claims, whatever the rest of the document says. Get advice on the agreement's wording before you rely on it.

Protected conversations and without prejudice discussions

Two separate rules can keep settlement discussions out of an employment tribunal, and they work differently.
  • Under section 111A of the Employment Rights Act 1996, evidence of pre-termination negotiations is inadmissible in an ordinary unfair dismissal claim, even where there is no existing dispute.
  • This protection, often called a 'protected conversation', does not extend to claims of automatic unfair dismissal, discrimination, or other claims outside ordinary unfair dismissal.
  • The common law 'without prejudice' rule protects genuine attempts to settle an existing dispute, and can cover a wider range of claims than section 111A.
  • Both protections can be lost where a tribunal finds 'improper behaviour' connected with the discussion, such as undue pressure, discrimination, harassment, victimisation or bullying.
Manager tip
Section 111A only protects a conversation about ending employment on agreed terms. If a dispute already exists, for example a live grievance, the without prejudice rule may also apply; take advice on which protection covers your situation before the conversation.

The ACAS Code: process and timing

The ACAS Code of Practice on Settlement Agreements sets out how a fair process should run.
  • Allow a minimum of 10 calendar days for the employee to consider the proposed written terms and take independent advice, unless both parties agree otherwise.
  • The Code treats not allowing this minimum period as an example of undue pressure.
  • Telling an employee, before any disciplinary process has begun, that they will be dismissed if they reject the offer is also treated as undue pressure under the Code.
  • If the agreement is rejected and the underlying issue remains, the Code recommends resolving it through the normal process, for example performance management, disciplinary or grievance procedures.
Manager tip
Put the 10-day consideration period in writing when you first raise a settlement agreement, so there is a clear record that the employee had proper time to take advice.

What a settlement agreement typically contains

ACAS guidance sets out the common building blocks, though the exact terms are negotiated between the parties.
  • A financial settlement, which may cover notice, accrued holiday and an additional payment.
  • A waiver of the specific claims the employee agrees not to pursue.
  • Reference wording, where agreed; ACAS guidance notes an employer is not obliged to provide a reference as part of a settlement agreement.
  • A confidentiality clause, where agreed by both parties.
  • Confirmation of the independent adviser's identity, and that the statutory conditions for a valid waiver have been met.

Confidentiality clauses: scope and limits

ACAS guidance is clear that confidentiality clauses in a settlement agreement are voluntary and have defined limits.
  • Confidentiality clauses are voluntary, and their wording should set out clearly what can be shared and with whom.
  • Agreements can allow disclosure to close family and professional advisers, according to ACAS guidance.
  • A confidentiality clause cannot lawfully prevent a worker from whistleblowing, or from reporting a crime to the police or seeking related support.
  • In higher education, existing legislation already prevents a confidentiality clause being used to stop someone disclosing sexual misconduct, abuse, harassment or bullying.
Watch out
A confidentiality clause that goes further than the law allows will not be enforceable to that extent, whatever the agreement says. Take advice on the wording before it is used, particularly where it touches on harassment or discrimination.

Tax treatment of termination payments

How a termination payment is taxed depends on what it is for, not simply on how it is labelled in the agreement.
  • The first £30,000 of a genuine termination payment, such as redundancy pay or an ex-gratia sum, is free of income tax, according to gov.uk guidance.
  • Above £30,000, the excess is taxable, and the employer (not the employee) pays Class 1A National Insurance on that excess.
  • Payment in lieu of notice (PILON), whether contractual or not, is taxed in full as earnings and does not benefit from the £30,000 exemption, under HMRC guidance.
  • Where notice is not worked in full, employers must calculate Post-Employment Notice Pay (PENP) using the statutory formula in the Income Tax (Earnings and Pensions) Act 2003; PENP is taxed as earnings and does not benefit from the £30,000 exemption either.
  • Unpaid wages, accrued holiday pay and contractual bonuses are taxed as earnings in the normal way, separately from the £30,000 exempt amount.
Manager tip
Ask your payroll provider or accountant to confirm the PENP calculation and the tax treatment of each element of a termination payment before you agree figures with the employee, so the net amount discussed matches what they actually receive.

NDA reform: the Employment Rights Act 2025 change

A future change will limit what confidentiality clauses, including those in settlement agreements, can validly cover.
  • The Employment Rights Act 2025 inserts a new section 202A into the Employment Rights Act 1996, which will make an NDA void to the extent it prevents a worker disclosing relevant harassment or discrimination, or an employer's response to it.
  • This provision is not yet in force. The government consulted between 15 April and 8 July 2026 on the detail, including which agreements should be excepted from the restriction.
  • The consultation proposes that a settlement agreement confidentiality clause covering harassment or discrimination would remain valid only if it meets extra conditions, such as written independent advice and a cooling-off period.
  • No commencement date has yet been confirmed by government; some legal commentators, including Lewis Silkin, expect the change to follow in 2027 once the regulations are finalised.
Watch out
Review any confidentiality clause covering harassment or discrimination in your settlement agreement templates, since section 202A will restrict what these clauses can validly cover once it is in force. Take advice on your templates ahead of commencement.

Getting settlement agreements right

A summary of the essentials covered in this guide:
  • A settlement agreement is a legally binding waiver of specified claims, valid under section 203 of the Employment Rights Act 1996 and, for discrimination claims, section 147 of the Equality Act 2010.
  • The employee must receive independent legal advice from a relevant independent adviser before the agreement is valid.
  • Follow the ACAS Code: allow a minimum 10-day consideration period and avoid undue pressure.
  • Know the difference between a protected conversation under section 111A and the common law without prejudice rule.
  • Only the first £30,000 of a genuine termination payment is tax-free; PILON and PENP are taxed as earnings in full.
  • Review confidentiality wording against current limits, and prepare for the Employment Rights Act 2025 restriction on NDAs covering harassment or discrimination.

How Jamie HR helps

Jamie HR keeps exit terms, advice confirmations and signed agreements recorded in one place.
  • Document storage for signed settlement agreements and adviser confirmations, held securely against the employee record.
  • Offboarding workflows that track notice, final pay and outstanding holiday as part of an exit.
  • Policy library so managers can find your settlement and confidentiality wording in one place.
  • Audit trail of key dates, so the consideration period and sign-off are easy to evidence if a decision is ever queried.
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This guide is general information, accurate to the best of our knowledge as of 2026, and is not legal advice. Employment law changes and every situation is different, so for a specific case take professional HR or legal advice. Sources: ACAS, gov.uk, HMRC and the Employment Rights Act 1996 and Equality Act 2010 (both as amended).