How Will the Employment Rights Act 2025 Affect Settlement Agreements?
The Employment Rights Act 2025 is one of the most significant changes to UK employment law in a generation. From 1 January 2027, two major reforms take effect simultaneously. Both will change how settlement agreements are used and what they are worth.
The qualifying period for ordinary unfair dismissal claims reduces from two years to six months. That means many more employees will gain legal protection much earlier in their employment.
At the same time, the statutory cap on unfair dismissal compensation, currently the lower of £123,543 or 52 weeks’ gross pay, will be abolished entirely. From January 2027, tribunals will assess compensation based solely on the employee’s actual financial loss. There is no upper limit.
Why Employees Will Have More Leverage in Settlement Negotiations
This matters for settlement agreements in two ways. First, more employees will be in a position to bring an unfair dismissal claim. Second, the potential value of those claims and therefore the leverage employees have in negotiations increases significantly. Previously, high earners had limited incentive to bring unfair dismissal claims because their actual losses often far exceeded the maximum award. With uncapped compensation, employees can now potentially recover their actual financial losses in full.
For employers, the cap previously provided a natural anchor point for settlement negotiations, allowing employers to calculate their maximum exposure with reasonable confidence. That anchor is gone from January 2027.
Why Are Settlement Agreements Likely to Become More Common?
Settlement agreements give employers certainty. Once signed, they usually prevent an employee from bringing the legal claims listed in the agreement.
For employers facing greater legal risk, more eligible claimants, uncapped compensation and a longer tribunal time limit from October 2026, offering a settlement agreement becomes a more attractive option than defending a claim. It is quicker, more certain and increasingly, more financially logical.
For employees, they can provide:
- Financial compensation
- A quicker resolution
- Greater certainty than tribunal proceedings
- An agreed employment reference
- A confidential exit from the business
However, every agreement should still be assessed on its own merits. The important question is not whether you have been offered a settlement agreement. It is whether the offer is fair.
Will Confidential Settlement Agreements Still Be Allowed?
Yes. A confidential settlement agreement will continue to be lawful after the Employment Rights Act 2025.
Confidentiality remains an important part of many settlement agreements because it protects both the employer and the employee. Employers often want to keep the financial terms private. Employees may also prefer confidentiality, particularly where they want to move on without further publicity.
A confidentiality clause can also protect commercially sensitive information and confidential business information obtained during employment. The Employment Rights Act 2025 does not remove the ability to include these clauses.
Instead, it continues the recent trend towards ensuring confidentiality clauses are used fairly and responsibly.
What Is a Settlement Agreement Confidentiality Clause?
A settlement agreement confidentiality clause explains what information can and cannot be disclosed after the agreement has been signed.
Most confidentiality clauses cover matters such as:
- The amount of compensation paid
- The terms of the settlement agreement
- Confidential business information
- The circumstances leading to the agreement
These clauses are common and are usually enforceable when drafted appropriately. However, confidentiality is not absolute. There are important exceptions that employers cannot remove.
What Can’t a Confidentiality Clause Prevent?
Many employees worry that signing a settlement agreement means they can never discuss what happened. That is not correct.
A settlement agreement confidentiality clause cannot prevent someone from:
- Reporting a criminal offence
- Making a protected whistleblowing disclosure
- Seeking independent legal advice
- Speaking to a regulated healthcare professional
- Cooperating with a regulator or law enforcement agency
Any clause attempting to remove these rights is unlikely to be enforceable. Modern settlement agreements usually include clear wording confirming these protections.
Are NDAs Legal in UK Settlement Agreements After the Employment Rights Act?
Yes. An NDA settlement agreement remains lawful where the confidentiality provisions are reasonable and comply with current law. The term “NDA” simply refers to a non-disclosure obligation.
Most settlement agreements contain some form of confidentiality provision. However, an NDA should never be used to conceal unlawful conduct or prevent employees from exercising protected legal rights.
Recent legal developments and regulatory guidance have reinforced this principle. Employers and solicitors are expected to ensure confidentiality clauses are drafted carefully and transparently.
Will Settlement Agreement Values Increase?
In many cases, yes, settlement values will increase. The removal of the compensation cap changes the negotiating dynamic fundamentally.
A senior employee earning £500,000 per year who is unfairly dismissed could potentially claim years of future losses, plus benefits and employer pension contributions. Ordinary unfair dismissal therefore becomes a much more significant standalone cause of action for higher-paid employees.
For employees in well-paid roles, the value of any potential claim increases significantly from January 2027. That means the floor for a reasonable settlement is likely to be higher too.
Settlement agreement values will still depend on individual circumstances, including:
- Length of service
- Salary and contractual benefits
- Notice entitlement
- The strength of any legal claims
- The employer’s legal exposure and desire for a quick resolution
There is no standard formula. Every case is different. But the removal of the compensation cap means that employees should take specialist advice before accepting any offer. This is particularly true of those in higher-paid or senior roles,
Why Independent Legal Advice Will Become Even More Important
A settlement agreement only becomes legally binding once the employee has received independent legal advice. However, a good solicitor should do much more than explain the wording of the agreement.
They should also assess:
- Why the agreement has been offered
- Whether your employer followed a fair process
- Whether you have any additional legal claims
- Whether the financial package reflects your legal position
- Whether the confidentiality clause is appropriate
- Whether any restrictive covenants should be amended
One of the biggest misconceptions is that every settlement agreement should be negotiated. That is not always the case. Some offers are fair from the outset, but others can be significantly improved.
The right advice depends entirely on your circumstances.
What Should Employees Do If They Receive a Settlement Agreement After January 2027?
Do not assume the first offer is either fair or unfair. Instead, take time to understand why it has been made.
You should consider:
- Whether the financial package reflects your legal position — including the value of any unfair dismissal claim under the new uncapped rules
- Whether the confidentiality provisions are appropriate and not broader than they need to be
- Whether any employment claims: discrimination, redundancy or constructive dismissal, have been properly factored in
- Whether the agreement protects your future employment prospects, including reference wording and restrictive covenants
The Future of Settlement Agreements
The Employment Rights Act 2025 is likely to make settlement agreements a more important part of resolving workplace disputes. More employees will gain legal protection earlier in their employment.
More employers are likely to consider settlement agreements when disputes arise.
At the same time, NDA settlement agreements, confidential settlement agreements and settlement agreement confidentiality clauses will continue to be lawful where they are properly drafted and comply with current legal requirements.
As employment law evolves, understanding whether a settlement agreement is fair will become increasingly important.
If you want to understand how settlement agreements fit into redundancy, unfair dismissal, discrimination and other workplace disputes, read our guide to Settlement Agreements and Workplace Disputes: How Employment Law Protects You. It explains how settlement agreements work, your legal rights and what you should consider before deciding whether to sign.
Not Sure Whether Your Settlement Agreement Is Fair?
The Employment Rights Act 2025 is changing the way workplace disputes are resolved. More employees are likely to receive settlement agreements, but that does not mean every offer is the right one.
Our specialist settlement agreement solicitors will review your agreement, explain your rights in and advise whether the offer fairly reflects your circumstances. If there is genuine scope to improve the package, we can negotiate on your behalf. If the offer is already fair, we’ll tell you that too.
In most cases, your employer pays our legal fees, so our advice costs you nothing personally. Get in touch with our specialist settlement agreement solicitors.
Frequently Asked Questions
Does the Employment Rights Act 2025 change what a settlement agreement must include?
The core legal requirements for a valid settlement agreement remain the same. It must be in writing and relate to a specific complaint or proceeding. The employee must have received independent legal advice from a qualified adviser. What changes from January 2027 is the context in which agreements are offered. More employees will qualify for unfair dismissal protection and the potential value of claims is uncapped, which means the financial terms of agreements are likely to be scrutinised more carefully.
Will my settlement agreement be worth more after January 2027?
Whether your settlement agreement will be worth more after January 2027 depends on your circumstances. If you have a potential unfair dismissal claim, the removal of the compensation cap means the value of that claim may be higher than it would previously have been. This is particularly relevant for employees in higher-paid or senior roles.
Taking specialist advice before accepting any offer is the only way to know whether the terms reflect your actual legal position.
Can my employer use a settlement agreement to stop me from reporting discrimination or whistleblowing?
No. A settlement agreement cannot prevent you from making a protected disclosure to a regulator. It can’t stop you from reporting a crime to the police or cooperating with a law enforcement or regulatory authority. Any clause that attempts to remove these rights is unlikely to be enforceable. If you have concerns about the scope of the confidentiality clause or whistleblowing in your agreement, a specialist solicitor can advise you before you sign.
Is a confidential settlement agreement the same as an NDA?
A confidential settlement agreement is not exactly the same as an NDA. A confidentiality clause is a standard feature of most settlement agreements and covers what can be disclosed after signing.
An NDA, or non-disclosure agreement, is a broader term for any agreement that restricts disclosure of information. In the context of settlement agreements, the two terms are often used interchangeably. However, the important point is the same: confidentiality clauses must be lawfully drafted and cannot be used to conceal wrongdoing or prevent protected disclosures.
