A Practical Guide to Settlement Agreements
What is a settlement agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding contract between an employer and employee. It typically settles actual or potential employment tribunal claims in exchange for agreed terms, most commonly a termination payment.
For the agreement to be valid, the employee must receive independent legal advice on its terms and effect from a qualified adviser, such as a solicitor.
When are they used?
Settlement agreements are commonly used when employment is ending by mutual agreement, during redundancy processes, or to resolve workplace disputes without the cost and uncertainty of tribunal proceedings.
They can benefit both parties by providing certainty and avoiding protracted disputes.
Key terms to review
Pay careful attention to the termination payment, notice period, and any bonus or commission entitlements. Check whether the payment is structured efficiently for tax purposes — the first £30,000 of a genuine termination payment may be tax-free.
Review confidentiality clauses, reference arrangements, and any post-termination restrictions. Ensure you understand what you can and cannot say about your employment and the circumstances of your departure.
The advisory process
Your solicitor will review the agreement, explain its implications, and advise whether the terms are reasonable in your circumstances. In many cases, employers contribute towards the cost of this advice.
You should not feel pressured to sign immediately. Take time to understand the agreement and ask questions about anything that is unclear.
What happens after signing
Once signed, the agreement becomes binding and you generally waive your right to bring employment tribunal claims covered by the agreement. Ensure you are comfortable with this before proceeding.
Keep a copy of the signed agreement and any related correspondence for your records.
This article is general information only and does not constitute legal advice.
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