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Settlement Agreements

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Settlement Agreements

What is a settlement agreement?

A settlement agreement[1] is a legally binding document between an employee and employer that records the agreement when the employment relationship has come to an end.

This can be either because of redundancy, a disagreement, if there is a break down in the relationship or if there are some kind of disciplinary issues ongoing including the lack of trust and confidence. A settlement agreement is used to agree the terms under which the employee will leave their employment.

It usually involves the employee receiving financial compensation in return for agreeing not to take the employer to court.

What is a Compromise Agreement?

A compromise agreement was a legally binding agreement between an employee and employer when the parties want to set out the terms and conditions reached when a contract of employment is to be terminated or a dispute is to be resolved.

A compromise agreement is the old term that was used before the introduction of the new term settlement agreement, which was on the 29th July 2013.

What is the difference between a Settlement Agreement and a Compromise Agreement?

Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements and in practice; there is very little difference between a Compromise Agreement and a Settlement Agreement.

One real difference is under the terms of a Settlement Agreements, discussions about the offer of such an Agreement cannot be used in an ordinary unfair dismissal claim unless there has been improper behaviour by the employer.

Is a settlement agreement legally binding?

Yes, as long as various conditions are in place in order for the agreement to be valid:

  • The agreement must be in writing

  • The agreement must relate to a specific claim that the employee could raise against the employer

  • The employee must have received legal advice

You will need to take legal advice from a specialist employment law solicitor and they will make sure that the agreement fulfils all the necessary legal requirements.

Do I need legal advice for a settlement agreement?

In order to be legally binding,[2] you must receive legal advice as to the terms and effect of the settlement agreement, and it is normal practice for your employer contribute to your legal fees.

Once you sign an agreement you will be waiving all your rights to bring an employment claim, which is why you need legal advice.

A specialist employment solicitor will be able to advise you on the merits of your potential claim and the amount of money you would be likely to receive at an Employment Tribunal.[3]

How much will it cost?

It is normal practice for the employer to pay a contribution towards legal fees; this can be between £350 and £500 (plus VAT) depending on the complexity of the issues to be advised on.

This is more than likely to cover all your legal fees in a straightforward matter, however, there will be occasions when your employer will be asked to contribute more or you may have to contribute to the solicitors fee, particularly if there are complicated post-termination covenants or a second signing is required where you are working your notice.

ACAS code of practice

To support the introduction of settlement agreement, ACAS has produced a statutory and none statutory code of practice (1).

These explain what settlement agreements are and provide guidance on the new law which concerns the confidentiality of settlement agreement negotiations.

How long do you have to consider the settlement agreement?

Employees should be given a reasonable amount of time to consider the proposed conditions of the agreement; the Acas Code of Practice suggests a minimum of 10 calendar days unless the parties agree otherwise.

Settlement agreements are a voluntary agreement and parties do not have to agree to them or enter into discussion about them. There may 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 problem, resolution may be pursued through a performance management, disciplinary or grievance process, or mediation whichever is the most appropriate. It is important that employers follow a fair process and use the ACAS Code of Practice on Discipline and Grievance procedures because, if the employee is dismissed, failure to do so may be 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, an employee may want to involve someone to help them, such as a work colleague or a trade union representative. Employers should, as a matter of good practice, allow an employee to be accompanied when meetings are held as this can often help progress settlement discussions.

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.

Should I negotiate on the terms of the settlement agreement?

Most of the times employees are very happy with the offer made to them by their employer, especially as the offer can damage the relationship moving forward. They just want to sign the agreement and move on and if you are in that position then great.

There are times, however, when the employee feels that the offer is not what they deserve or appropriate in the circumstances and it may be on those occasions that is right to negotiate the agreement.

How you negotiate is always crucial from raising a grievance to the threat of making an employment tribunal[3] claim.

It is important to keep in mind that:

  • Any employment tribunal claim and process is likely to take between 3 to 6 months and will take longer to recover any money;

  • Employment Tribunal proceedings can be a very stressful time;

  • There is never any certainty that you will be successful in an Employment Tribunal hearing:

  • There is a cost to taking employment tribunal proceedings.

It can be sometimes more productive to try the softly softly approach and use your skills of persuasion as this will bring the whole process to a quicker conclusion.

Taking advice from your solicitor on the best strategy is always advisable.


[1] Settlement agreements | Acas advice and guidance. 2013 Jun 21 [cited 2017 Feb 22]; Available from:
[2] Participation E. Employment Rights Act 1996 [Internet]. [cited 2017 Mar 9]. Available from:
[3] Employment Tribunal - GOV.UK [Internet]. [cited 2017 Mar 9]. Available from: