Settlement Agreements
A settlement agreement is a legally binding contract between an employer and an employee (or worker) under which the employee gives up their right to bring certain employment claims in exchange for agreed payments or benefits.
Settlement agreements are widely used in exit negotiations, redundancy exercises, and dispute resolution. They provide legal certainty for employers and employees when appropriately drafted and executed.
What Is a Settlement Agreement?
A settlement agreement (formerly known as a compromise agreement) is a documented agreement that:
- specifies the terms of exit or settlement
- clarifies what claims are waived
- sets out payment and non-payment terms
- is signed by both parties
Settlement agreements help employers avoid costly Employment Tribunal litigation and provide a clear end point for employment relationships. They are generally used in situations such as redundancy, performance-related exits, or disputes over conduct or contractual terms.
Legal Requirements and Safeguards
To be legally binding, settlement agreements must meet specific statutory requirements under UK law:
Independent Legal Advice
Employees must receive independent legal advice on the fairness and implications of the settlement agreement in relation to the claims being waived. Employers often cover the cost of this advice.
Written Terms
The agreement must be in writing and include all key terms, clearly expressed.
Specifically Identified Claims
The document must identify the specific categories of claims that the employee is giving up the right to bring. A general waiver of all potential claims without specificity may not be enforceable.
Voluntary Entry
Both parties must enter into the agreement voluntarily, without undue pressure or misrepresentation.
When these conditions are met, settlement agreements provide strong legal certainty and are usually upheld by tribunals if challenged.
When to Use a Settlement Agreement
Settlement agreements are appropriate in a range of circumstances, including where:
- an employment relationship is ending by mutual consent
- there is a potential dispute or risk of tribunal claims
- there is a need to avoid public litigation
- a redundancy or exit strategy includes enhanced payments
- you want to include confidentiality or non-disparagement terms
Settlement agreements can also be used to secure restrictive covenant enforcement or clarify post-termination obligations.
Key Terms in Settlement Agreements
A well-drafted settlement agreement typically covers:
1. Termination Date
The agreed effective date of the employment termination.
2. Payments and Benefits
Detailed description of all payments, which may include:
- statutory redundancy pay (where applicable)
- payment in lieu of notice (PILON)
- agreed ex gratia compensation
- accrued holiday pay
- enhanced pension contributions
- any other agreed benefits
All payments should be clearly itemised and subject to the correct tax treatment.
3. Waiver of Claims
The agreement must specify which claims the employee is waiving. Common categories include:
- unfair dismissal
- discrimination and harassment
- breach of contract
- redundancy related claims
- unlawful deduction from wages
- whistleblowing-related claims
Each category should be expressed clearly and specifically.
4. Confidentiality and Non-Disparagement
Settlement agreements commonly include clauses requiring:
- confidentiality about terms of the agreement
- non-disparagement or non-denigration of the employer
These provisions should be balanced and enforceable without overreaching.
5. Restrictive Covenants and Garden Leave
Where appropriate, settlement agreements may reinforce or introduce:
- restrictive covenants (non-compete, non-solicitation)
- garden leave provisions
- return of company property and data
These terms should be carefully reviewed for enforceability and consistency with the main contract.
Best Practice Checklist
Employers should:
- have a clear business rationale for the agreement
- ensure independent legal advice is provided and evidenced
- include a schedule of waived claims
- itemise all payments and tax treatment
- document any conditional or staged payments
- communicate deliverables (e.g., notice return, property return)
- allow adequate time for the employee’s adviser to review
Following these practices reduces the risk of future disputes.
Common Pitfalls to Avoid
Employers should avoid:
- vague or overly broad claim waivers
- rushing the independent advice process
- insufficient documentation of payments
- failing to update restrictive covenants consistently
- mis-categorising payments for tax purposes
Early legal involvement helps prevent costly mistakes.
How We Support Employers
Settlement agreements are powerful tools when used correctly. Our employment solicitors advise employers on:
- drafting and negotiating settlement agreements
- analysing legal risks and claim valuations
- structuring settlements for tax efficiency
- aligning settlement terms with business strategy
- assisting with implementation and documentation
Legal expertise ensures enforceability and protects organisational interests.
