Settlement Agreements

Settlement agreements, formerly known as compromise agreements, are legally binding agreements that set out the terms and conditions agreed between parties (normally employer and employee) that waive an individual’s right to make a claim covered by the agreement to an employment tribunal or court.

Generally, a settlement agreement is entered into by an employer and employee/ex-employee, however they can also be agreed between an employer and a worker who has a complaint about holiday pay, or an unsuccessful job applicant who feels they were discriminated against at a job interview.

A settlement agreement confirms the finalised financial settlement agreed to dissolve the working relationship. Every settlement agreement must be tailored to reflect the individual circumstances of the case in question. The settlement agreement will not be legally binding unless the employee in question has taken advice from an independent advisor.

Key features of a settlement agreement:

  • They are legally binding
  • They can waive an individual’s rights to bring a claim covered by the agreement, for example, the right to make a claim to an employment tribunal or court
  • The employee (or former employee) usually receives some form of financial payment and will also often receive a reference as part of the agreed terms
  • They are entirely voluntary – they include terms and conditions that are mutually agreed and parties do not have to enter into them if they do not wish to do so
  • They are often reached through a process of discussion and negotiation. The parties do not have to accept the terms initially offered – there may be a process of negotiation during which both sides make offers and counter offers
  • Negotiations about settlement agreements are often confidential in the sense that if an agreement is not reached, the negotiations may not be admissible as evidence in claims before an employment tribunal or in other court proceedings

Advantages of using a settlement agreement:

  • Draws a line under a difficult situation
  • Guards against future claims, as well as reducing the risk of potential adverse publicity
  • Can provide a swift and dignified end to an employment relationship that is not working
  • Can avoid the time, cost and stress involved for both parties in a tribunal claim
  • Can be used at any stage of an employment relationship
  • Can help you avoid having to undergo lengthy, time-consuming disciplinary and/or performance improvement plans
  • Can help you keep the circumstances leading to your employee’s contract being terminated and/or the terms and payment offered confidential
  • Can help you prevent the employee from making disparaging remarks
  • Can help you reaffirm their post-termination covenants
  • Can bring you peace of mind knowing that they cannot pursue a claim against you in the tribunal or court (so long as you have not misrepresented the reason for termination)