When an employment relationship ends, a settlement agreement often provides a practical resolution for both parties. It’s a legally binding contract in which an employee waives the right to bring claims, such as unfair dismissal or discrimination, in exchange for a financial settlement and other benefits. 

Formerly known as a compromise agreement, the term "settlement agreement" has been used since the Enterprise and Regulatory Reform Act 2013.

Below are the five essential things you must understand to navigate one wisely.

1. It Must Be Legally Robust

For a settlement agreement to be legally binding, it must satisfy several statutory requirements, including:

• Be in writing; 

• Specify the particular claims it is settling (e.g. unfair dismissal, discrimination); 

• Include a certificate from an independent legal adviser (such as a solicitor), who must have professional indemnity insurance; 

Without these conditions, particularly the requirement for independent legal advice, the agreement cannot validly prevent an employee from pursuing statutory claims.

2. Independent Legal Advice – You Must Have It

It’s not optional, you must take independent legal advice before signing. This isn't just good practice; it’s a legal requirement. Your adviser confirms you understand what you're giving up and whether the settlement terms are fair. Employers typically cover the cost of these legal fees.

3. What You Receive (and What You Give Up) 

Upon signing a settlement agreement, you waive the right to bring certain claims against your employer, commonly including unfair dismissal, discrimination, breach of contract, and redundancy claims. 

Typically in return, the agreement includes:

• Payment of salary up to the termination date; 

• An ex gratia or termination payment, negotiated beyond statutory entitlements; 

• Payment for accrued holidays or benefits, and potentially pension contributions or car allowances; 

• A reference, which can be explicitly agreed as part of the deal; 

• Confidentiality and non-derogatory clauses, and sometimes post-employment restrictions;

4. Confidentiality and Restrictions

Settlement agreements almost invariably include confidentiality clauses covering not just the terms, but often the fact of the agreement and the circumstances. Breaching such clauses can lead to legal consequences.

5. Once Signed, It’s Final

Once a settlement agreement is signed, and after you've received independent legal advice, it is usually final and binding. There’s no standard “cooling off” period, and you cannot typically withdraw unless there is serious misconduct like fraud or misrepresentation. It’s essential to review all clauses carefully, especially around ongoing obligations like confidentiality or non compete terms, before signing on the dotted line.

For more information on how we can help, please contact us on 01524 907100, info@pre-law.co.uk or through our online enquiry form.