What is a settlement agreement?

A settlement agreement is a legally binding agreement between an employer and an employee under which the employee agrees to give up the right to bring an employment tribunal or court claim relating to the matters covered by the agreement, usually in return for financial compensation. A settlement agreement is often used to end the employment relationship on agreed terms, for example as an alternative to the employer instigating disciplinary or capability proceedings. It is common for settlement agreements to include a term that the employer will provide an agreed reference relating to the employee. It is usually agreed that the settlement agreement will remain confidential.

A settlement agreement will be effective to prevent an employee from bringing proceedings only if:

  • it is in writing;
  • it is stated to relate to the particular complaint or proceedings;
  • the employee has received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, its effect on their ability to pursue their rights before an employment tribunal;
  • the adviser is covered by professional indemnity insurance;
  • the adviser is identified in the agreement; and
  • the agreement states that the applicable statutory conditions regulating settlement agreements are satisfied.

Settlement agreements were known as compromise agreements before 29 July 2013.