Settlement Agreements Explained: What They Are and WhatYou Need to Know

‍A settlement agreement is a legally binding contract betweenan employer and an employee (or former employee) that sets out agreed terms forending the employment relationship or resolving a workplace dispute. It isoften used to avoid lengthy disciplinary, grievance, or redundancy processes,and to bring certainty to both parties.

Settlement agreements are entirely voluntary, neither theemployer nor the employee can be forced to sign one. However, once signed, theyusually waive the employee’s right to pursue certain claims in an employmenttribunal or court, including claims for unfair dismissal, wrongful dismissal,or discrimination, depending on the terms of the agreement.

Because of the significant consequences of giving up theserights, the law requires employees to obtain independent legal advice from aqualified adviser (usually a solicitor, barrister, or certified unionrepresentative) before the agreement can be legally effective. The adviser mustconfirm in writing that they have explained the terms and their effect to theemployee.

Employers often contribute towards or cover the cost of thislegal advice, but they are not legally obliged to do so.

What Should a Settlement Agreement Cover?

A well-drafted settlement agreement typically deals with:

  • Notice periods - whether the employee will work their notice, receive payment in lieu of notice (PILON), or be placed on garden leave;
  • Outstanding payments - unpaid salary, accrued but untaken holiday pay, commission, or bonuses;
  • Termination payments - often an ex-gratia (compensation) sum, sometimes tax-free up to £30,000, depending on the circumstances;
  • References - agreed wording to be provided to future employers;
  • Confidentiality clauses - obligations on both sides to keep the agreement and settlement confidential;
  • Waiver of claims - specifying which potential claims the employee agrees not to bring;
  • Post-employment restrictions - confirming or amending any restrictive covenants in the employment contract;
  • Return of company property - obligations for equipment, documents, or other items.
Why Employers Offer Settlement Agreements

Common reasons for offering settlement agreements include:

  • Resolving disputes without resorting to an employment tribunal;
  • Ending employment amicably where there are performance or conduct issues;
  • Avoiding or simplifying redundancy processes;
  • Managing long-term sickness absence or breakdowns in working relationships;
  • Protecting the employer from potential claims under discrimination or whistleblowing laws.

A settlement agreement can be a practical tool for ending anemployment relationship and avoiding lengthy disputes. However, because itinvolves waiving statutory and contractual rights, it is essential foremployees to seek advice from an independent solicitor or qualified adviser tofully understand the terms and ensure the agreement is fair and legally valid.

For more information contact us on 01524907100, info@pre-law.co.uk or through our online enquiry form.

 

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