Understanding Settlement Agreements in Employment Law

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When an employee has an employment dispute or potential legal claim against their employer in the UK, the parties may attempt to resolve the matter through a settlement agreement rather than proceeding to an employment tribunal claim. A settlement agreement is a legally binding contract where the employee agrees to settle and drop their potential claims against the employer in exchange for a negotiated payment of compensation.

What is a Settlement Agreement?

Under UK employment law, for a settlement agreement (formerly known as a compromise agreement) to be legally binding, it must meet the following requirements:

  • The agreement must be in writing.
  • The agreement must relate to a specific complaint or proceedings.
  • An independent legal adviser must have informed the employee of the terms and effect of the proposed agreement, and the impact it would have on their ability to pursue that complaint or proceeding before an employment tribunal.
  • The agreement must identify the adviser and their advice must be covered by insurance.
  • The agreement must state that the conditions regulating settlement agreement under the Employment Rights Act have been satisfied.


Benefits of Settlement Agreements

There are advantages to using settlement agreements versus proceeding to an employment tribunal:

For Employees:

  • Receive compensation without employment tribunal delays
  • Avoids the costs, risks, and stress of litigation
  • Tax benefits if under £30,000
  • Ability to negotiate exit terms
  • Receive a reference
  • An employer usually contributes towards the costs of getting legal advice


For Employers: 

  • Avoids reputational damage of defending claims
  • Prevents future tribunal claims by the employee
  • Can include restrictive covenants
  • Provides certainty on the outcome


Independent Legal Advice Required

Given the complex nature of employment law and the fact that the employee must receive independent advice for a settlement agreement to be binding, it is crucial for both parties seek legal advice.

Employers will want to ensure they are offering appropriate compensation and terms to settle the matter and employees need to have any agreement fully reviewed to understand their rights and obligations before compromising their ability to bring employment claims.

For assistance in your employment matters by experienced solicitors, please contact IHRC Legal.


This information was correct at the date of publishing.


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