Settlement Agreement — UK Drafting Reference

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Drafting reference for English-law settlement agreements — ERA 1996 s.203(3), ACAS COT3 alternative, protected conversations, ITEPA tax, £30,000 exemption.

The Settlement Agreement is the contractual mechanism by which an employer obtains a binding waiver of statutory employment claims from a departing employee in exchange for a termination package. It performs at exit the same risk-allocation function that the employment contract performs at the start: it converts the open-ended population of potential claims — unfair dismissal, discrimination, whistleblowing detriment, holiday pay, unpaid wages, breach of contract, all of them — into a discrete, identified, paid-for settlement. The drafting is precise because the statutory framework is precise. Section 203 of the Employment Rights Act 1996 makes any agreement purporting to exclude or limit the operation of the Act void — except where the agreement satisfies six cumulative conditions set out in s.203(3) (or, as an alternative route, where the agreement is concluded through ACAS conciliation and recorded on a COT3 under s.18 of the Trade Union and Labour Relations (Consolidation) Act 1992). This page is the drafting reference for the settlement agreement under English law. Cross-reference the employment contract page for the underlying contractual architecture and the restrictive covenants page for the post-termination restraint regime that the settlement agreement typically restates or modifies.

Section 203 ERA 1996 — The Statutory Frame

Section 203(1) ERA 1996 provides that any provision in an agreement is void in so far as it purports either to exclude or limit the operation of any provision of the Act or to preclude any person from bringing any proceedings under the Act before an employment tribunal. The drafting consequence is that the contractual waiver of a statutory employment claim is prima facie unenforceable. The exceptions are narrow.

Section 203(2) preserves conciliated settlements — agreements reached with the assistance of an ACAS conciliation officer (the COT3 route). Section 203(3) preserves settlement agreements that meet six conditions, all of which must be satisfied: (a) the agreement is in writing; (b) the agreement relates to the particular complaint or proceedings; (c) the employee has, before entering into the agreement, received advice from a relevant independent adviser as to its terms and effect (including in particular its effect on the ability to pursue rights before an employment tribunal); (d) there is in force, when the adviser gives the advice, a contract of insurance, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the employee in respect of loss arising from the advice; (e) the agreement identifies the adviser; (f) the agreement states that the conditions regulating settlement agreements under the Act are satisfied.

A relevant independent adviser is defined in s.203(3A) and includes a qualified lawyer; a certified trade-union official; a worker at an advice centre certified by the centre as competent to give advice; or any other person specified by the Secretary of State. Section 203(3B) excludes from the definition advisers who are employed by or acting for the employer, or otherwise have an interest in the matter that would compromise independence.

The conditions are cumulative. The Employment Appeal Tribunal in Industrious Ltd v Horizon Recruitment Ltd [2010] ICR 491 confirmed that failure to satisfy any one condition renders the s.203 waiver void to the extent it purports to settle statutory claims. The conditions are also strictly construed: in University of East London v Hinton [2005] EWCA Civ 532, the Court of Appeal held that a general “all claims of whatsoever nature” waiver did not satisfy the “particular complaint” requirement in s.203(3)(b) — each statutory claim must be identified, either by description by reference to the relevant statutory provision or by particular nature.

The ACAS COT3 Alternative

The COT3 route under TULR(C)A 1992 s.18 is the procedural alternative to s.203(3). Where the parties reach agreement with the assistance of an ACAS conciliation officer (typically following early conciliation under s.18A or in the course of tribunal proceedings), the agreement can be recorded on a COT3 form and is then binding without compliance with the s.203(3) conditions. The independent-adviser requirement does not apply; the writing requirement is satisfied by the COT3. The route is procedurally simpler and is the conventional vehicle for late-stage tribunal settlements and for cases where the employee has not engaged independent legal advice.

The legal effect of a COT3 is the same as a properly-executed s.203(3) settlement: a binding waiver of identified statutory claims. The drafting of the COT3 (or the more elaborate underlying agreement to which the COT3 may refer) is the same — particularised claims, scope of waiver, statutory carve-outs, tax warranty — but the procedural overhead is materially lower.

Pre-Termination Negotiations — Section 111A

Section 111A ERA 1996, inserted by the Enterprise and Regulatory Reform Act 2013, creates a statutory protected conversation regime for pre-termination settlement discussions. Evidence of pre-termination negotiations is inadmissible in evidence in ordinary unfair-dismissal proceedings — the employer can therefore explore a settlement without the conversation being weaponised as evidence of pre-determined dismissal. The protection is narrower than the common-law without-prejudice rule because the without-prejudice rule requires an existing dispute and is general across all civil litigation, whereas s.111A applies automatically to settlement discussions in the employment context whether or not a dispute exists.

The s.111A protection has two important limits. First, it does not apply to claims other than ordinary unfair dismissal — discrimination claims, whistleblowing automatic-unfair-dismissal claims, breach-of-contract claims, and other statutory claims are governed by the without-prejudice rule (where the necessary conditions are met) or by the general law of admissibility. Second, the improper-behaviour exception in s.111A(4) lifts the protection where the employer’s conduct in the negotiations is improper — putting undue pressure, threatening dismissal without proper process, or making discriminatory remarks. The ACAS Code of Practice on Settlement Agreements (2013), made under TULR(C)A 1992 s.207, sets out the parameters of acceptable conduct and is mandatory consideration for tribunals applying the improper-behaviour test.

Particularised Waiver of Claims and the Hinton Rule

The drafting fulcrum of the settlement agreement is the particularised waiver. The agreement must list the statutory claims being settled by reference to the statute or by particularised description. The conventional approach is a numbered schedule listing claims by type — unfair dismissal (ERA 1996 s.94); wrongful dismissal (common-law breach of contract); discrimination on each protected characteristic (EA 2010 ss.13, 19, 26, 27); harassment (EA 2010 s.26); victimisation (EA 2010 s.27); failure to make reasonable adjustments (EA 2010 ss.20-21); unlawful deductions from wages (ERA 1996 Part II); breach of working-time rights (WTR 1998); whistleblowing detriment and automatic-unfair dismissal (ERA 1996 ss.47B, 103A); failure to provide a written statement of particulars (ERA 1996 s.11); equal pay; redundancy pay; family-leave claims; and so on. The drafting is comprehensive; the Hinton rule is that omission of a statute or class of claim leaves that claim unsettled.

Two categories of claim are subject to statutory non-waivability. First, future, unknown claims for discrimination under EA 2010 s.147(3) cannot be settled in advance — the section was crafted to address concerns identified in Lunt v Merseyside TEC Ltd [1999] ICR 17 and replaces analogous provisions in the predecessor anti-discrimination statutes. The drafting move is a “claims in contemplation” framing — claims that are or could be in the employee’s contemplation as at the date of signing. Second, protected disclosures under PIDA — the right to make protected disclosures cannot lawfully be contracted away.

The settlement agreement should also carve out, expressly: (a) accrued pension rights (typically a contractual right, not a statutory employment claim, and economically valuable); (b) personal injury claims not in contemplation at signing (latent claims, asbestos exposure etc.); (c) the right to enforce the settlement agreement itself; (d) the PIDA protected-disclosure right; (e) the right to cooperate with regulatory and law-enforcement investigations.

The Supreme Court’s decision in BCCI SA v Ali [2001] UKHL 8 is the foundational authority on the construction of general release clauses. Lord Bingham and Lord Nicholls held that even broadly-worded releases are construed by reference to the parties’ actual knowledge at the time and to the nature of the dispute they were settling. A release does not normally cover a claim that the parties could not have known of at the time. The drafting consequence is to combine known-claims particularisation with an express “all such claims (whether known or unknown, in contemplation or not) of the types listed in Schedule 1” framing, with appropriate carve-outs.

Compensation Architecture and the ITEPA Tax Treatment

The settlement payment is typically built from several components. Salary and accrued holiday pay to the Effective Date of Termination are taxable as earnings under ITEPA 2003 Part 2. Payment in lieu of notice (PILON) is taxable as earnings whether or not the contract contains a PILON clause — the position simplified from April 2018 by the introduction of the Post-Employment Notice Pay (PENP) calculation in ITEPA 2003 s.402D. PENP is the basic-pay equivalent of the unworked notice period, calculated from the contractual notice formula and the employee’s basic pay — regardless of how the parties characterise the termination payment, PENP is taxed as earnings.

The ex gratia compensation component for loss of office and damages for breach of contract qualifies for the £30,000 tax-free amount under ITEPA 2003 ss.401-403. The exemption applies to the first £30,000 of qualifying termination payments, combined across all payments from the same or associated employer. Above £30,000, payments are taxable as earnings (subject to special rules in s.413 for foreign-service relief and similar). From 6 April 2020, Class 1A National Insurance Contributions are payable on termination payments above £30,000 — the result of the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019. Class 1A is an employer-side NIC; the employee bears no employee NIC on the over-£30,000 portion.

Statutory redundancy pay and contractual redundancy pay within the £30,000 envelope qualify for the exemption. A contribution to the employee’s legal fees paid directly to the adviser, for the purpose of obtaining advice on the terms of the settlement agreement, is exempt under ITEPA 2003 s.413A. The conventional contribution is between £500 and £1,500 plus VAT, depending on the complexity of the agreement.

The outplacement support, continuation of benefits, and similar non-cash items have their own tax treatments — outplacement of a qualifying kind is exempt under ITEPA 2003 s.310; private medical insurance continuation is a benefit in kind taxable on the employee. The drafting consequence is that the agreement should itemise each payment and benefit, allocate it to the appropriate tax bucket, and include a tax warranty by the employer (treating each payment as it has stated) and an employee tax indemnity (employee bears any further tax liability properly the employee’s).

Confidentiality, Non-Disparagement, and the NDA Reform Programme

Confidentiality and non-disparagement clauses in settlement agreements have been the subject of substantial regulatory attention since the public-interest debate following #MeToo. The SRA Warning Notice on the Use of Non-Disclosure Agreements (March 2018, updated 2024) imposes professional-conduct expectations on solicitors drafting NDAs in the settlement context. The Worker Protection (Amendment of Equality Act 2010) Act 2023 introduced a new positive duty on employers to take reasonable steps to prevent sexual harassment, in force from 26 October 2024.

The mandatory carve-outs from any confidentiality clause in a settlement agreement are: (a) PIDA protected disclosures — the right cannot be silenced; (b) cooperation with regulatory and law-enforcement investigations, including the Equality and Human Rights Commission, the Health and Safety Executive, the Financial Conduct Authority, the police, and HMRC; (c) disclosure to professional advisers (lawyers, accountants, tax advisers); (d) disclosure to HMRC; (e) disclosure to immediate family on a confidential basis; (f) disclosure required by law or court order; (g) truthful testimony in any proceedings.

In the sexual-harassment and discrimination context, the regulatory expectation (and the substantial body of policy commentary in the Speak Out at Work campaign) is that confidentiality should not lock the employee into silence about the underlying conduct vis-à-vis the police, regulators, medical professionals, or close family. Aggressive over-drafting in this area is now reputationally and professionally costly.

Independent Adviser’s Certificate

The independent adviser’s certificate is a discrete document — usually appended to or executed on the settlement agreement — signed by the relevant independent adviser, certifying: (a) the adviser is a relevant independent adviser within the meaning of ERA 1996 s.203(3A); (b) the adviser advised the employee on the terms and effect of the agreement and, in particular, its effect on the employee’s ability to pursue rights before an employment tribunal; (c) at the time the advice was given, the adviser held the required professional indemnity insurance under s.203(3)(d). The adviser must be named in the body of the agreement under s.203(3)(e).

The drafting risk that recurs in practice is the insurance status of the adviser at the date the advice was given. If the adviser was uninsured (lapsed PII) at the date of advice, the s.203(3)(d) condition is not met and the s.203 waiver is void. The standard precaution is for the adviser to confirm in writing the dates and limits of cover before signing the certificate.

Sample Structure

A modern settlement agreement typically follows this order: preamble; parties; recitals (employment, circumstances, mutual desire to resolve); definitions (Effective Date of Termination, Settlement Sum, Adviser); termination date and arrangements; settlement sum (itemised by tax bucket); waiver of claims (with numbered schedule of identified claims); statutory carve-outs (pension, latent PI, PIDA, regulatory cooperation, enforcement); tax warranty and indemnity; confidentiality with carve-outs; non-disparagement (mutual); reference and announcement; restrictive covenants (restated/modified); return of property; whistleblowing acknowledgement; statement that the s.203 conditions are satisfied; independent adviser’s certificate (annexed); governing law and jurisdiction; execution. For COT3 settlements, the structure compresses but the substantive content is the same.

Cross-references

Bibliography

Disclaimer: Handbook content is informational, not legal advice. Settlement agreements are statutorily regulated and procedurally exacting — the independent-adviser requirement is not optional. Always consult a solicitor admitted to practise in England and Wales (acting as relevant independent adviser for the employee, or as drafter on the employer side) for binding decisions on specific settlement-agreement matters. Last verified 2026-05-11.