What is a settlement agreement?

You have been handed a document, or told a word on the phone, and the word may not be the one this site uses. Four of the terms in circulation mean the same thing, two of them mean something materially different, and three of them mean nothing at all in UK law. This page sorts them out first and explains them afterwards.

The same thing, called thirteen different things

Start here. The middle column names the provision that gives each word its legal content — and where it is blank, that absence is the answer.

Why half of these words changed in 2013

If your document says “compromise agreement”, nothing is wrong with it. The word was changed by a single section of a single Act, and that section did nothing except change the word.

What the rename did and did not do

Read what it actually says: for “compromise” (in each place where it occurs) substitute “settlement”. It is a find-and-replace across several statutes. The conditions did not change, the tax treatment did not change, and agreements signed before the change are unaffected.

It took effect on 29 July 2013 (S.I. 2013/1648, art. 2(c)).

Why the old word still turns up

Two reasons, and one of them is worth noticing. Precedent banks are old, so a firm may still be using a template headed with the former name. That is harmless in itself.

What is worth checking is condition (f) of ERA 1996 s.203(3): the agreement must state that the conditions regulating settlement agreements under the Act are satisfied. A template that has not been touched since before 29 July 2013 may still declare compliance in the old language. In practice this is unlikely to defeat the agreement, but it is the sort of thing an adviser reads for — and it tells you how much attention the document has had.

COT3: the route that does not need a solicitor

This is the one real fork in the road, and almost nothing written for employees explains it.

Ordinarily, an agreement that stops you bringing a tribunal claim is void unless all six conditions in s.203(3) are met — including that you received advice from a relevant independent adviser. But s.203 contains an exception, and the exception is the COT3.

What that sentence does

It removes the six conditions. Where a conciliation officer has acted, the agreement binds you without an independent adviser, without the agreement naming one, and without insurance being in force for that advice. None of the s.203(3) machinery applies, because a different safeguard — the involvement of Acas — is doing the work instead.

And the duty that conciliation officer is under:

The safeguard is not the same safeguard

Note the wording: the officer shall endeavour to promote a settlement between the persons who would be parties to the proceedings. Between. The conciliator is neutral by design. They are not your adviser, they do not tell you whether the number is reasonable, and they have no duty to protect your interests over the employer’s.

That is not a criticism of Acas, which is doing exactly the job Parliament gave it. It is a reason to be clear about what you are and are not getting. A settlement agreement comes with somebody whose job is to advise you, and your employer usually pays for them. A COT3 does not.

More on the Equality Act route and why it is a separate question.

“Severance” is not a British legal term

It is not a trick and it is not wrong to use it. It simply has no content. There is no statutory severance pay in the United Kingdom, no severance entitlement, and no section of any Act that uses the word in this sense.

What an employer usually means by it

Some combination of three things that do have definitions: statutory redundancy pay if the dismissal is a redundancy, contractual or statutory notice, and negotiated compensation. The first two are arithmetic. The calculator separates them.

Why the vagueness matters

Because a single undivided figure is the easiest way to present money you were owed anyway as though it were a concession. If “a severance package of £20,000” turns out to be £16,000 of notice and statutory redundancy pay plus £4,000 of compensation, the negotiation was always about £4,000 and nobody said so. How to take a redundancy offer apart.

Which document actually binds you, and to what

A clause-by-clause walk through what the document contains sits alongside this section; here we deal only with what makes it bind at all.

All of the binding routes work the same way underneath: your right to bring a claim is protected by statute, the statute makes any attempt to sign it away void, and then the statute carves out specific exceptions. What differs is which carve-out you are in.

The six conditions are not a formality

Each one is capable of defeating the agreement on its own. The one people overlook is (d): the adviser has to be insured at the moment the advice is given. That is why the agreement names the adviser and their firm, and why a friend who happens to be a solicitor is a bad idea unless they carry cover for this work.

What is never settled, whatever you sign

Some things cannot validly be given away in advance. A provision purporting to stop you making a protected disclosure is void to that extent under ERA 1996 s.43J, whatever else the agreement says. Accrued pension rights and personal injury claims you do not yet know about are conventionally excluded by name in a well-drafted agreement. What else is worth asking to have excluded.

The money words, and which half each lands in

A settlement figure always has two halves and they are taxed under different rules. Most of the vocabulary confusion in this area is really confusion about which half a word belongs to.

The threshold is not an allowance

£30,000 is a threshold below which a qualifying payment is not charged, not a benefit you are given. It is also aggregated across employments with the same and associated employers, so it does not reset. How it actually applies, and the post-employment notice pay trap.

Which one are you being offered?

Four questions settle it, in this order.

And one question that is not about the document at all

When have you been asked to sign by? The Acas Code recommends allowing at least 10 days to consider a settlement agreement, and a shorter deadline is the employer’s exposure rather than yours. Why, and what to write if the deadline is short.

What the alternative to all of this looks like

Every offer is priced against what it would cost the employer to refuse. In April to June 2026 the employment tribunal received 25,122 jurisdictional complaints and disposed of 11,232, leaving 100,338 open. That queue is the reason settlement offers exist at all.

HMCTS management information for April to June 2026, covering cases on the Reform case management system and single claims only. It is not official statistics and the figures are provisional. Source: Tribunals statistics quarterly: April to June 2026, published 10 September 2026. The regional breakdown.

Common questions