Most Employment Tribunal claims do not reach a final hearing. Many are resolved by settlement — an agreement between you and your employer that ends the dispute in exchange for something, usually money.
Settlement is not failure. Sometimes it is the right outcome. But signing away your legal rights is a serious step, and pressure to settle — from your employer, from ACAS, or simply from exhaustion — is real. This page explains the two main types of settlement agreement, what they mean, and what to think about before you sign.
The two types of settlement
There are two legally recognised ways to settle an Employment Tribunal claim:
A COT3 agreement, reached through ACAS conciliation A settlement agreement (formerly called a compromise agreement), reached directly between you and your employer
Both are binding contracts. Once signed, you give up the right to bring – or continue – the claims covered by the agreement. The key differences are in how they are reached and what formalities are required.
COT3 agreements
A COT3 is a settlement reached with the help of an ACAS conciliator, either during Early Conciliation or after a claim has been issued. ACAS records the terms and both parties sign.
COT3 agreements do not require you to have independent legal advice before signing. This distinguishes them from settlement agreements (see below) and is one reason they can be reached more quickly.
That speed is also a risk. The absence of a legal advice requirement means there is no formal pause in the process that prompts you to think carefully. A COT3 can be agreed and signed before you have properly considered whether the terms are fair.
What a COT3 can cover
A COT3 can settle any claims that ACAS has the power to conciliate, which includes all Employment Tribunal claims – unfair dismissal, discrimination, breach of contract, unlawful deduction from wages, and others.
The agreement will usually specify which claims are settled. Read this carefully. A COT3 that settles “all claims arising from the employment” is broader than one that settles only the specific claims listed. Make sure you understand whether the agreement covers everything you have, or only part of it.
Full and final settlement
Most COT3 agreements include a “full and final settlement” clause, which means you are agreeing that the payment resolves all claims you have or might have against your employer arising from your employment. This typically includes claims you have not yet brought and may not even have thought of.
Think carefully about whether there are any outstanding issues – wages, holiday pay, pension, notice pay – that should either be included in the settlement sum or explicitly carved out.
Settlement agreements
A settlement agreement is a written contract agreed directly between you and your employer, without ACAS involvement. It may be proposed at any stage – before a claim is issued, during proceedings, or at the door of the Tribunal.
For a settlement agreement to be legally valid and to waive your Employment Tribunal rights, it must meet specific statutory requirements:
- It must be in writing
- It must relate to a particular complaint or proceedings
- You must have received independent legal advice from a relevant independent adviser — usually a qualified solicitor or barrister — on the terms and effect of the agreement, and in particular its effect on your ability to bring proceedings
- The adviser must be identified in the agreement and must have a current contract of insurance or professional indemnity insurance covering the advice
- The agreement must state that these conditions have been satisfied
The independent legal advice requirement
This is the key protection for employees in the settlement agreement process. The requirement exists precisely because settlement agreements involve signing away statutory rights, and Parliament decided that should not be done without advice.
Your employer will often offer to pay a contribution toward your legal advice costs – typically a fixed sum, often between £250 and £500 plus VAT. This is standard practice but is not required by law, and the contribution may not cover the full cost of proper advice, particularly in a complex case.
You are entitled to take reasonable time needed to get that advice properly. Do not let your employer pressure you into a rushed signing.
What the settlement sum covers
Settlement agreements and COT3s will specify what the payment is for. This matters for tax purposes.
Payments for unfair dismissal and discrimination are treated differently for tax. The first £30,000 of a payment that is genuinely compensatory for loss of employment is generally free of income tax and National Insurance. Payments that represent pay in lieu of notice, holiday pay owed, or bonuses will normally be taxed as income.
How the payment is characterised in the agreement affects how it is taxed. Get advice on this if the sum involved is significant.
What to think about before you sign
Is the amount fair?
Compare the offer against what a Tribunal might realistically award. Think about:
- Injury to feelings – what Vento band does your case fall into?
- Financial loss – have you lost earnings, and how much?
- The strength of your case – how confident are you that a Tribunal would find in your favour?
- The risks of litigation – cost, time, stress, uncertainty
A settlement that is lower than a Tribunal might award can still be worth accepting if the litigation risk is high or if certainty has value to you. A settlement that looks significant in isolation may be poor value if your losses are substantial and your case is strong.
What claims are covered?
Read the claims and proceedings covered by the agreement carefully. If you have claims you have not yet pursued, check whether the agreement covers those too.
Are there conditions attached?
Settlement agreements often include conditions beyond the payment. Common ones include:
- Confidentiality clauses – preventing you from talking about the settlement terms, or sometimes about the events that led to it. Think about whether this matters to you, and whether you can comply.
- Non-disparagement clauses – preventing you from saying anything negative about your employer. These can be reciprocal (your employer agrees not to disparage you) or one-sided.
- References – the agreement may include an agreed reference wording. Make sure it is something you are happy with.
- Return of property / deletion of data – you may be required to return company equipment or delete confidential information.
- Restrictions on future employment – post-termination restrictions (non-compete clauses, non-solicitation of clients or colleagues). If these are included, think carefully – they may affect your ability to work in your field.
- Any future claims – If a settlement agreement or COT3 contains reference to “claims [you] may have” this is usually interpreted as meaning any claims you may have in the future i.e. things that your employer has not done yet. You should consider this very carefully, as it is a very wide waiver of your rights and, in effect, is permission for your employer / former employer to treat you unlawfully, as you will have waived your right to ever sue them for breaches of the specific laws set out in your COT3 or Settlement Agreement.
Accrued benefits
Check that the agreement deals clearly with any outstanding pay, holiday entitlement, pension contributions, or share scheme rights. If these are not addressed, there may be ambiguity about whether they are included in the settlement sum or owed separately.
Withdrawing from a settlement
A COT3 or settlement agreement, once signed, is binding. You cannot usually withdraw from it on the basis that you changed your mind or that you subsequently received better advice.
This is why getting proper advice before signing matters so much. Once you have signed, the claim is over.
Getting advice before you sign
DWU members can access advice through our clinics on whether a settlement offer is worth considering. Just Reasonable Ltd can advise on the legal and financial implications of specific settlement terms and, where appropriate, can review draft agreements.
This page provides legal information, not legal advice. It reflects the law in England, Scotland, and Wales. Tax treatment of settlement payments depends on individual circumstances and you should take advice specific to your situation.