Settlement Agreements in Edinburgh: A Guide for Employees and Employers

A settlement agreement is a legally binding contract between an employer and an employee. It usually sets out agreed terms for resolving a workplace dispute or ending employment, often in return for a financial payment and other agreed benefits.

If you have been offered a settlement agreement, or you are an employer considering proposing one, it is important to understand what the agreement means and what you should check before signing.

What is a settlement agreement?

A settlement agreement sets out how a workplace dispute or the end of employment will be dealt with. In return for an agreed payment or other benefits, the employee agrees not to pursue the specific legal claims covered by the agreement.

Settlement agreements may be used in situations including:

• redundancy
• disciplinary or grievance issues
• performance concerns
• workplace disputes
• potential employment tribunal claims
• executive exits involving bonuses, shares or restrictive covenants

You may also hear the older term “compromise agreement”, which is another name for a settlement agreement.

What makes a settlement agreement valid?

For a settlement agreement to validly waive specified employment claims, certain legal requirements must be met. Generally, the agreement must:

1. Be in writing.
2. Relate to particular complaints or proceedings.
3. Include advice from a relevant independent adviser.
4. Identify the adviser and confirm that the required legal conditions have been met.

A relevant independent adviser can include a qualified solicitor or, in certain circumstances, an authorised trade union representative or advice centre worker.

The agreement should clearly identify the claims being settled, so it is important to understand exactly which rights you are giving up.

What does a settlement agreement include?

Depending on the circumstances, an agreement may cover:

• termination date and notice arrangements
• settlement or compensation payment
• salary and holiday pay
• redundancy pay
• agreed reference
• confidentiality provisions
• restrictive covenants
• bonus or share arrangements
• contribution towards legal fees

Do not focus only on the payment. Other terms may affect your future employment and legal rights.

Is settlement agreement money taxable?

Not every payment made when employment ends is tax-free.

The first £30,000 of qualifying termination payments may benefit from an income tax exemption. However, salary, holiday pay and applicable notice pay are generally taxable. Post-Employment Notice Pay (PENP) is also treated differently from qualifying termination payments.

The tax treatment depends on the payment and circumstances, so you should ask your solicitor to explain the proposed settlement package before signing.

For information about legal costs, see our employment law fees page.

What should you do if you receive one?

Do not sign immediately. Settlement agreements are voluntary, and Acas generally recommends allowing at least 10 calendar days to consider the formal written terms and obtain independent advice.

Read the entire agreement carefully and check the payment, claims being waived, confidentiality provisions, restrictive covenants and any continuing obligations.

You should also obtain independent legal advice. Our settlement agreements for employees page explains how we can help.

Depending on the circumstances, it may also be possible to negotiate the payment, reference, termination date, restrictive covenants or legal-fee contribution.

For employers

Settlement agreements can provide certainty when resolving a workplace dispute or ending employment.

Employers should consider which specific claims need to be settled, how payments will be treated for tax purposes, confidentiality and restrictive covenant provisions, legal-fee contributions and whether the employee has enough time to obtain independent advice.

Read more about our settlement agreements service.

Employment law changes

Employment law is changing. From 1 October 2026, the time limit for most employment tribunal claims has increased from three months less one day to six months less one day for relevant matters.

From 1 January 2027, the qualifying period for ordinary unfair dismissal protection is scheduled to reduce from two years to six months.

These changes may affect the rights being considered in a settlement agreement, so timely legal advice is important.

FAQs

Conclusion

Settlement agreements can provide certainty for employees and employers, but they can also involve giving up important legal rights.

Before signing, make sure you understand the payment, tax position, claims being waived, confidentiality provisions and any relevant deadlines.

If you are dealing with a settlement agreement in Edinburgh, ELP’s employment law team can discuss your circumstances and explain your options.

This article provides general information and does not constitute legal advice. Employment law can change, and your circumstances may affect your legal position. You should obtain independent legal advice before taking any action in relation to a settlement agreement.