This article applies to England, Wales and Scotland.
In brief: There are three main ways to settle an employment dispute in the UK: a COT3 agreement through ACAS, a settlement agreement arranged directly with your employer, or an informal negotiated payment. Each works differently, waives different rights, and offers different protections. Understanding which one you're being offered matters.
Last updated: March 2026
By Yerty | This guide was created using analysis of tribunal cases and official ACAS/Gov.uk guidance.
If your employer has offered to "settle" and you're not sure what that actually means in practice, this guide is for you. The word "settlement" gets used loosely, but in employment law it refers to specific types of agreement, each with different rules about what you're giving up and what protections you have.
This guide explains the three routes, compares them side by side, and helps you understand what questions to ask before agreeing to anything.
Important: This guide provides information about UK employment law. Yerty is not a law firm and does not provide legal advice. Every situation is different. If you've been offered a settlement of any kind, consider speaking to a solicitor for advice specific to your circumstances.
The three types of employment settlement
When an employment dispute is resolved without going to a full tribunal hearing, it almost always takes one of three forms:
- A COT3 agreement, facilitated through ACAS
- A settlement agreement, arranged directly between you and your employer
- An informal negotiated payment, agreed privately without a formal legal document
Each has a different legal status, different requirements, and different consequences for your rights. The first two can waive your statutory employment rights (like unfair dismissal or discrimination claims). The third cannot.
COT3 agreement
A COT3 is a legally binding agreement drawn up through ACAS, typically during early conciliation or while a tribunal claim is ongoing. An ACAS conciliation officer facilitates the negotiation and records the agreed terms.
Key features:
- Legally binding once both parties agree, even before the document is signed
- No requirement for you to get independent legal advice (though it's advisable)
- Can waive statutory claims including unfair dismissal, discrimination, and whistleblowing
- ACAS conciliation is free
- Typically shorter and simpler than a settlement agreement (often 1-3 pages)
- Can cover future claims if the wording is broad enough
COT3s are most common when you've already contacted ACAS or filed a tribunal claim. Our analysis of settlement data shows that a significant proportion of employment disputes resolve at this stage, before a hearing ever takes place.
Settlement agreement
A settlement agreement (formerly called a compromise agreement) is a formal legal contract between you and your employer. It's governed by section 203 of the Employment Rights Act 1996 and has strict requirements that must be met for it to be valid.
Key features:
- Must be in writing
- Independent legal advice from a qualified adviser (usually a solicitor) is required before signing
- Your employer typically contributes to the cost of that advice (often £250-£500 plus VAT, though this varies)
- Must relate to "particular complaints or proceedings", meaning it has to specify which claims you're waiving
- Usually much more detailed than a COT3 (often 10+ pages)
- Commonly includes clauses on confidentiality, non-derogatory statements, tax indemnities, and references
Settlement agreements are more often used when there's no formal ACAS conciliation underway. They're typical when your employer initiates a conversation about your exit, sometimes through a protected conversation or "without prejudice" discussion. They're also more common for senior employees with complex contractual arrangements involving share options, bonus clawbacks, or restrictive covenants.
Informal negotiated payment
This is the route people understand least, and it's the one where you have the fewest protections.
An informal negotiated payment is when your employer offers you money (perhaps an extra month's salary, a lump sum, or some other financial sweetener) in exchange for you agreeing to leave quietly. It might come through a conversation with HR, a letter, or even a verbal discussion.
Key features:
- No ACAS involvement
- No requirement for legal advice
- Usually no formal legal document
- Cannot waive your statutory employment rights
That last point is critical. Under section 203(1) of the Employment Rights Act 1996, any agreement that purports to exclude or limit your statutory rights is void unless it meets the specific requirements of a settlement agreement or a COT3. An informal deal, no matter how much money is involved, does not meet those requirements.
This means that even if you accept an informal payment, you could still bring a tribunal claim afterwards. However, a tribunal might take the payment into account when considering remedy, and there are practical considerations: your employer may argue you've already been compensated, or a tribunal might reduce any award to reflect what you've already received.
Side-by-side comparison
| COT3 | Settlement Agreement | Informal Payment | |
|---|---|---|---|
| Legally binding? | Yes | Yes | As a contract, yes. But cannot waive statutory rights |
| ACAS involved? | Yes (required) | No | No |
| Legal advice needed? | No (but advisable) | Yes (mandatory) | No |
| Who pays for advice? | You (can negotiate) | Employer contributes | N/A |
| Waives statutory claims? | Yes | Yes | No |
| Typical length | 1-3 pages | 10+ pages | Often no document |
| Enforceable? | Yes, via courts | Yes, via courts | Limited |
| Cost to you | Free (ACAS) | Free (employer pays adviser) | Free |
Which type are you being offered?
If you're not sure which type of settlement your employer is proposing, ask yourself these questions:
Has ACAS been involved? If yes, and a conciliation officer is facilitating the conversation, you're looking at a COT3.
Has your employer asked you to get legal advice and offered to pay for it? That's a strong signal you're being offered a settlement agreement.
Has your employer mentioned a payment but without any formal process? That's likely an informal negotiated payment. Be aware that this won't prevent you from bringing a tribunal claim later, but equally, accepting money and then claiming could complicate your position.
Has the conversation been labelled "without prejudice"? This means the discussion can't normally be used as evidence in tribunal. It often precedes a settlement agreement, but the "without prejudice" label itself doesn't determine which type of settlement follows.
Common misconceptions
"A settlement is a settlement — they're all the same." They're not. The legal consequences of each type are fundamentally different. A COT3 and settlement agreement both waive your statutory rights. An informal payment does not, no matter what your employer says or what you sign.
"If I accept any money, I can't go to tribunal." Not true for informal payments. Only a properly constituted COT3 or settlement agreement can legally prevent you from bringing a statutory claim. Accepting an informal payment doesn't automatically bar you from tribunal, though it may affect any award.
"My employer said this is 'final' — so I have to accept." No settlement is final until you agree to it. You can negotiate, take time to consider, seek advice, or decline entirely. For a settlement agreement, you have a legal right to independent advice before signing. For a COT3, the ACAS conciliator should ensure you understand the terms.
Frequently Asked Questions
What is the most common type of employment settlement?
COT3 agreements are the most common route for resolving tribunal claims and potential claims. According to ACAS, around 38% of early conciliation cases result in a settlement. Settlement agreements are more common for negotiated exits where no formal claim has been raised.
Can I negotiate the terms of any settlement?
Yes, all three types are negotiable. For a COT3, the ACAS conciliator relays offers between the parties. For a settlement agreement, negotiation usually happens between solicitors. For an informal payment, you negotiate directly with your employer or HR.
Do I need a solicitor for a settlement?
For a settlement agreement, yes — independent legal advice is a legal requirement. For a COT3, no, but it's strongly recommended, especially if the waiver clause is broad or the sums are significant. For an informal payment, advice isn't required but can help you understand what rights you're preserving or giving up.
Is the first £30,000 of a settlement tax-free?
The first £30,000 of a genuine termination payment is normally exempt from income tax under current HMRC rules. However, payments for notice, holiday, or contractual entitlements are taxed as earnings. The tax treatment can differ depending on how the payment is categorised in the agreement.
Can my employer force me to accept a settlement?
No. Settlement is voluntary. If you decline, your employer cannot punish you for refusing, and doing so could itself give rise to a claim. You have the right to take your case to tribunal instead.
What if my employer offers a settlement but I want to go to tribunal?
You can decline any settlement offer and proceed with your claim. However, consider the risks: tribunal outcomes are uncertain, the process takes months, and our analysis of tribunal outcomes shows that most claims settle or are withdrawn before reaching a hearing.
How long do I have to decide on a settlement offer?
There's no statutory time limit for responding to a settlement offer, but your underlying tribunal time limit (currently 3 months minus 1 day from the act complained of) continues to run. Don't let settlement negotiations cause you to miss your deadline for contacting ACAS or filing a claim.
Sources
- "How the process works", ACAS, 2026 — https://www.acas.org.uk/early-conciliation/how-early-conciliation-works
- "Settlement agreements", Working Families — https://workingfamilies.org.uk/articles/settlement-agreements-and-cot3s/
- Employment Rights Act 1996, Section 203 — https://www.legislation.gov.uk/ukpga/1996/18/section/203
- Employment Tribunals Act 1996, Section 18 — https://www.legislation.gov.uk/ukpga/1996/17/section/18