What is a settlement agreement?


5 November 2018

By Alexandra Dean

Employment disputes can be expensive and time-consuming to resolve, causing a lot of stress and hassle to both employers and employees if they are not handled correctly. However, in many cases, employment disputes can be resolved quickly in a way that works for everyone involved by using a settlement agreement.

A settlement agreement is a legally binding agreement made between an employer and an employee to resolve a specific employment claim or claims. It involves the employee agreeing not to make a formal claim to an Employment Tribunal, usually in exchange for a one-off payment or other considerations.

While they are often used to resolve an issue that an employee has raised, such as unfair dismissal or discrimination, settlement agreements can also be used to protect a business against the possibility of future claims. For example, it is common to use a settlement agreement when making an employee redundant, preventing the risk of their later claiming they were treated unfairly during the redundancy process.

Settlement agreements can offer a number of benefits for both employers and employees, but the right steps need to be taken when creating the agreement and having it signed by the employee in order for it to be legally binding.

How settlement agreements benefit employers

The advantages of settlement agreements for employers include:

  • Allowing disputes to be resolved faster.
  • The legal costs involved are usually significantly less than those involved in an Employment Tribunal.
  • You avoid the uncertainty of an Employment Tribunal hearing, where the tribunal panel can potentially order you to pay substantial compensation.
  • Providing an opportunity to repair the relationship with an employee you wish to continue employing.
  • Allowing you to keep the dispute private, protecting your reputation, as opposed to an Employment Tribunal, which is public.

How settlement agreements benefit employees

The advantages of settlement agreements for employees include:

  • Allowing the matter to be resolved faster
  • Giving you a definite settlement, rather than risking an Employment Tribunal where the panel could decide against you
  • Allowing you to avoid the higher legal costs of representation for an Employment Tribunal
  • Can help you maintain a better relationship with your employer/former employer
  • Any payment you receive (up to £30,000) will usually be tax-free (depending on the circumstances)


Making a settlement agreement legally binding

For a settlement agreement to be legally binding it must:

  • Be in writing
  • Cover a specific complaint or complaints (i.e. it cannot simply prevent the employee from bringing a claim for any reason)
  • Only be signed by the employee after they have:
  • Had independent advice from a lawyer or certified, authorised trade union member with appropriate insurance or professional indemnity cover
  • Had reasonable time to consider the agreement (usually a minimum of 10 days)
  • Identify the employee’s adviser
  • State the statutory conditions regulating the agreement

Get expert help drafting or reviewing a settlement agreement

Gepp Solicitors regularly acts for both employers and employees in a wide range of employment disputes, giving us strong expertise in the use of settlement agreements.

If you are an employer, we can help you negotiate with an employee and draft a settlement agreement for you that protects your interests. If you are an employee, we can support you in negotiations with your employer and review any settlement agreement you are offered to make sure it is fair and appropriate.

For expert advice on settlement agreements for employers and employees, call us now on 01245 228141 or email deana@gepp.co.uk.

This article should not be used as legal advice.