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A settlement agreement is a contract between employer and employee (or ex-employee) governing the arrangement reached between them when the employee has an employment claim. Employers may make an offer of settlement where:

  • there is a dispute at work,
  • there has been a termination of the employment contract due to redundancy or reorganisation, or
  • the employee is already progressing a claim in the employment tribunal.

The employer will usually offer a compensation payment (also referred to as severance payment or termination payment) in return for the employee’s undertaking to not to pursue their claim in the employment tribunal. The settlement agreement may or may not deal with a payment in lieu of notice of termination.

Employers need to make sure their employee takes advice about the settlement agreement from a relevant independent adviser (a solicitor for instance) – they usually make a contribution towards legal costs.

Both parties may find a negotiated settlement useful. If the correct formalities are fulfilled, the employee will be precluded from pursuing employment claims. In this way the employer knows that it is protected from future action, and any adverse publicity that may create.

The employee will receive a financial sum without recourse to the courts and they are then released from work and are able to move on with their lives.

More information about settlement agreements is available on our dedicated Settlement Agreements site. Or Call us on 020 3948 1900 for a Free Chat to discuss (i) settlement agreement drafting, if you are a business or (ii) the terms of a settlement agreement your employer has given to you, if you are an employee.

Settlement agreements

For comprehensive information on settlement proposals, severance payments and taxation, visit our settlement agreements website

Visit our settlement agreement website

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