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What is a Settlement Agreement?

View profile for Peter Brady
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Settlement Agreements are legally binding contracts between employer and employee and can be a useful tool for resolving disputes. They are most often used to end the employment relationship and set out the full terms agreed between the parties. Whether you are an employer or employee considering a Settlement Agreement, it's important to seek legal advice to understand the potential benefits and drawbacks of this option.

For employees

There are many benefits to you as an employee by reaching a settlement, including receiving a financial payment in exchange for dropping any legal claims. This can provide a sense of closure and allow you to move on from the dispute without having to go through a lengthy court process. Settlement Agreements can also include provisions that protect an employee's reputation, such as a non-disclosure agreement. You may also be able to negotiate terms that may not have been available in court, such as a positive reference or a longer notice period.

For employees, it’s important to carefully consider the terms of the Settlement Agreement and;

  • seek legal advice before signing
  • ensure the terms are fair and reasonable
  • confirm that adequate compensation for claims is being given
  • fully understand the terms of the agreement, including any confidentiality or non-disclosure clauses
  • consider the impact of a Settlement Agreement on future employment opportunities and reputation.

It’s important to know that as an employee you are under no obligation to accept a Settlement Agreement and should only do so, once independent legal advice has been obtained. If you don’t receive independent legal advice, then the Settlement Agreement is not legally binding. For this reason, your employer will usually pay for, or contribute towards the cost of your legal advice, which is typically between £250-£500 +VAT. 

If on signing a Settlement Agreement there is an extended period between the date of signature and the termination date, the employer may ask the employee to sign a re-affirmation letter. A reaffirmation letter is usually signed by the employee shortly after the termination of their employment. The letter itself will ask the employee to confirm that the circumstances have not changed between the date of the initial signature and the termination date. 

For employers

Settlement Agreements can be a useful tool for managing legal risks and protecting your business interests. By agreeing to a settlement, as an employer you can avoid the uncertainty and expense of a trial, as well as the potential for negative publicity.

Additionally, Settlement Agreements can include confidentiality clauses, which can protect your reputation as an employer and prevent sensitive information from being made public. 

Before pursuing a Settlement Agreement, it's important to ensure that the Settlement Agreement;

  • is appropriate for the situation
  • has terms that are fair and reasonable
  • sets out the full terms agreed between the parties
  • complies with all legal requirements, including the requirement that the employee has received independent legal advice.

It is an important note that Settlement Agreements can also be agreed between an employer and someone other than an employee (or former employee) who may be able to bring a claim to an employment tribunal – for instance, a worker who has a complaint about holiday pay or an unsuccessful job applicant who feels they were discriminated against at a job interview.

In summary

A Settlement Agreement is legally binding and can be a useful option for both employers and employees when resolving disputes. Where the employment relationship has broken down it’s an opportunity for both parties to have a ‘clean break’ and conclude the working relationship. 

If you have received a Settlement Agreement and you would like advice on the terms contained, or if you are an employer who would like an agreement drafted, please contact our employment team on 01827 317075 or