Settlement Agreements – How They Work & How to Use Them


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Settlement Agreements can be a useful tool in resolving workplace disputes and for bringing employment relationships to an end in a mutually agreed way.  It is a legally binding contract between employer and employee which settles claims that the employee may have against their employer.

Sarah Begley Solicitor in the Employment Team at The Wilkes Partnership considers how Settlement Agreements work and when to use them, key terms and common negotiation points.

What is a Settlement Agreement?


Settlement Agreements, formerly known as Compromise Agreements, are legally binding contracts which can be used to end an employment relationship on agreed terms. They can also be used where the employment is ongoing, but both parties want to resolve a dispute that has arisen between them.   These Agreements can be offered at any stage of an employment relationship and can be proposed by either an employer or an employee, although in most cases it will usually be the employer.

There are specific conditions that must be met in order for a Settlement Agreement to be valid, they are:-


  1. The Agreement must be in writing
  2. The Agreement must relate to a particular complaint or proceedings
  3. The employee must have received advice from a relevant independent advisor, such as a Lawyer or a certified and authorised member of a Trade Union
  4. The independent advisor must have a current contract of insurance or professional indemnity covering the risk of a claim by the employee in respect of loss arising from the advice
  5. The Agreement must identify the advisor
  6. The Agreement must state that the applicable statutory conditions regulating the Settlement Agreement have been met

Settlement Agreements usually include some form of payment to the employee and often include a reference.  All Settlement Agreements are entered into on a voluntary basis.

Once a valid Settlement Agreement has been signed, the employee will be unable to make an Employment Tribunal claim about any type of claim, which is listed in the Agreement save for limited claims in respect of pension, personal injury and claims to enforce the Agreement itself.

Reaching a Settlement Agreement


A reasonable amount of time should be given to the employee to consider the proposed conditions of the Agreement.

The ACAS Code of Practice stipulates a minimum of 10 calendar days unless agreed otherwise between the parties.

Settlement Agreements are voluntary and parties do not have to agree to them or enter into any discussion about them. There can be a process of negotiation during which both sides make proposals and counter proposals until an agreement is reached or both parties decide no agreement can be reached.

If a Settlement Agreement is not reached and depending on the nature of the dispute or issue, resolution may be pursued through a performance management, disciplinary or grievance process, or mediation whichever is best suited. It is important that employers follow a fair process. If the employee is dismissed, failure to do so may give grounds for a claim of unfair dismissal.

Settlement Agreement Meeting


Although there is no statutory right for the employee to be accompanied at any meeting to discuss the Agreement, as a matter of good practice, it is sensible for employers to allow an employee to be accompanied when meetings are held as this can often help progress meaningful discussions.  The Settlement Agreement will specify a date when the employment relationship will come to an end along with details of payment and the timing of that payment.  Payment should be made as soon as practicable after the Agreement has been reached.

Other non-financial terms can include an agreed reference, a confidentiality clause and a clause preventing the employee from making any derogatory comments about the employer.

Ending The Employment Relationship


When the Settlement Agreement includes an agreement to end the employment relationship, then employment can end with the required notice, or the timing can be agreed as part of the Settlement Agreement.

Details of payment and the timing should be included in the Agreement; any payments should be made as soon as practicable after the Agreement has been reached.

Sarah Begley comments:  “Employers are reminded that Settlement Agreements provide a very useful tool to resolve work place disputes without the need to undertake legal action. However, Settlement Agreements are technical legal documents which contain important terms regarding employment rights post termination of employment.  Independent legal advice is a legal requirement for individuals but for employers, early professional advice is recommended.”

To discuss anything arising from this update, please contact Sarah Begley on 0121 733 4312 or via email at [email protected] You can also contact any other member of the Employment Team on 0121 233 4333 or email us at [email protected].

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