Do I Need a Settlement Agreement
When Leaving a Job?

If your employer has offered you a settlement agreement, or you are in a workplace dispute heading towards an exit, understanding how these agreements work in Ireland could save you thousands and protect your rights.

A settlement agreement (sometimes called a compromise agreement or severance agreement) is a legally binding contract between an employer and employee that typically resolves a dispute in exchange for a financial payment. The employee agrees to waive their right to bring certain claims (usually to the Workplace Relations Commission), and in return receives a severance payment and agreed terms of departure.

When Are Settlement Agreements Used?

Settlement agreements are common in several situations. Redundancy situations where the employer wants certainty that no WRC claim will follow. Performance management disputes where the relationship has broken down and both sides want a clean exit. Allegations of discrimination, harassment, or bullying where the employer wants to resolve the matter before it reaches a WRC hearing. Constructive dismissal situations where the employee feels they can no longer continue in the role. Senior executive departures where the terms of exit need to be formally documented.

In most cases, the employer proposes the settlement agreement and the negotiation begins. However, employees can also propose a settlement if they want to leave on agreed terms rather than resign without any financial package.

The 2024 Act Changed Everything About NDAs

The Maternity Protection, Employment Equality and Preservation of Certain Records Act 2024 introduced significant restrictions on Non-Disclosure Agreements in employment settlements. Since 20 November 2024, any NDA that prevents an employee from disclosing allegations of discrimination, harassment, sexual harassment, or victimisation is void. This is a fundamental change from previous practice where employers routinely required blanket confidentiality.

There are only two exceptions. First, an NDA that forms part of a WRC mediation settlement is permitted. Second, an "excepted NDA" is permitted, but only if the employee requested it, the employee received independent legal advice (paid for by the employer), the NDA is in clear and accessible language, it is of unlimited duration (unless the employee chooses otherwise), the employee has a 14-day cooling-off period to withdraw without penalty, and the NDA includes a clause confirming it does not prevent disclosures to the Gardai, a solicitor, a doctor, a mental health professional, Revenue, or a trade union representative.

The 14-day cooling-off period has been particularly significant in practice. Employers cannot rely on a settlement being final until 14 days after both parties sign. In the first year of the Act, there have been cases of employees withdrawing from fully executed agreements within this period.

Tax Treatment of Settlement Payments

The tax treatment of a settlement payment depends on how it is structured. Statutory redundancy payments are fully exempt from income tax, PRSI, and USC. These are calculated based on two weeks' pay per year of service plus one bonus week, subject to a weekly ceiling of EUR 600.

Ex-gratia termination payments (amounts above statutory redundancy) may be partially exempt from income tax under Section 192A of the Taxes Consolidation Act 1997. The basic exemption is EUR 10,160 plus EUR 765 for each complete year of service. If the employee has not previously used this relief, the Standard Capital Superannuation Benefit (SCSB) calculation may provide an even higher exemption. The SCSB formula is: (Average annual salary x Years of service / 15) minus any lump sum retirement benefits already received. Revenue approval may be required for the SCSB calculation.

Payments for loss of employment are generally exempt from PRSI and USC up to the exempt amounts. Any portion of a settlement payment that constitutes notice pay, holiday pay, or other contractual entitlements is taxable as normal employment income.

What Should a Settlement Agreement Include?

A properly drafted settlement agreement should include the names and details of both parties, the employment start and end dates, a clear statement of the settlement amount and how it is broken down (statutory redundancy, ex-gratia, notice pay, holiday pay), the tax treatment of each component, a comprehensive waiver of claims (specifying which statutes are being waived), any ongoing obligations (non-compete, non-solicitation), the NDA provisions (if applicable, in compliance with the 2024 Act), an agreed reference, return of company property, and a clause confirming the agreement is the entire agreement between the parties.

Should You Get Independent Legal Advice?

Yes, always. Even though our tool generates compliant settlement agreements, the specific terms of your settlement should ideally be reviewed by a solicitor who understands the full context of your situation. This is especially important if the settlement involves allegations of discrimination, harassment, or sexual harassment (where the 2024 Act applies), if the settlement amount is significant, if you are being asked to agree to restrictive covenants, or if you are uncertain about whether the offer is fair. Many employment solicitors offer a fixed-fee review of a settlement agreement. You can compare quotes on SolicitorCompare.ie.

Common Mistakes to Avoid

Signing without understanding the tax implications is the most common and costly mistake. A payment structured as "compensation for loss of office" is treated differently from one structured as "arrears of salary". The difference can be tens of thousands of euros in tax. Second, accepting the first offer without negotiation. Settlement amounts are almost always negotiable, especially where the employer faces a strong WRC claim. Third, overlooking the reference. The agreed reference is often as valuable as the financial payment, particularly for senior employees. Fourth, ignoring pension implications. If you are a member of the company pension scheme, check what happens to your pension benefits on termination.

This is a self-service document generation tool. It does not constitute legal advice. For complex or high-value situations, we recommend consulting a solicitor.