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What is a Settlement Agreement?


A settlement agreement is a legally binding contract between an employer and an employee,which comes into play more often than not when an employee is leaving the business.

The document normally documents an agreement under which the employee waives rights to make a claim covered by the agreement to an employment tribunal or court and in return for which terms are agreed under which the employee is agreeable to leave employment.

Settlement agreements are sometimes called compromise agreements which is a name by which they were previously known.

Settlement agreements can be proposed by either an employer or an employee and can be offered at any stage of an employment relationship.

They can be used to end an employment on agreed terms or to resolve an ongoing dispute, for example, a dispute over holiday pay.   They are also very commonly used in redundancy situations or TUPE situations for example where a site moves and employees dont want to relocate but rather leave employment.

For a settlement agreement to be legally binding, certain conditions must be met. The main ones are:

  1. It must be in writing;
  2. The agreement must relate to a particular complaint or proceedings;
  3. The agreement must be signed by the employee;
  4. The employee must have received independent legal advice on the terms from a lawyer or a certified and authorised member of a trade union. The adviser must be identified in the agreement and the adviser must be insured; and
  5. The agreement must state that the statutory conditions regulating settlement agreements have been met.

Settlement agreements are voluntary on both sides and neither party has to agree to it or enter into discussions about them. 

Usually there is a process of negotiation during which both sides state their proposals or counter proposals until an agreement is either reached or until it is decided that no agreement can be reached. The discussions on a settlement agreement are often made on a “without prejudice” basis in order to protect the conversation. 

They can also be suggested as part of a protected conversation which is a process under which employer and employee in certain circumstances can talk more freely about the termination of employment and the conversation is then not disclosable in any future legal proceedings.

Once a valid settlement agreement has been signed, the employee will be unable to make any claim specified in the agreement at an employment tribunal or a court.

Where the parties are unable to reach an agreement, the settlement discussion cannot usually be referred to as evidence in an employment tribunal or in the court. 

It is normal for parties to negotiate on the terms of a settlement agreement. 

Our solicitors are very experienced and can fully advise employers and employees on the common terms in an agreement.

Terms which are normally negotiated relate to :-

1. Agreed references

2. Announcements

3. Outplacement services

4. Taxation

5. Negotiation on the settlement sum or as it is often known the "ex gratia" payment


If an employee decides not to sign the settlement agreement, the time limits with which they must comply in order to pursue legal claims at an employment tribunal are normally three months less one day from the date the employment terminated or in the case of discrimination claims, three months less one day from the date of the discriminatory act.

We are able to offer advice as to the prospects and merits of any claims in the event that negotiations are unsuccessful

For more information please contact us on 0113 322 9222 to speak to one of our employment law specialists.

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