What is a settlement agreement?

A settlement agreement is a written contract between employer and employee (or ex-employee).

Where an employer is at risk of an employee making a legal claim against them, the employer may prefer to resolve the matter swiftly and out of court by making an offer of settlement.

The employer offers a compensation payment to settle the employee's claim, and in return requests the employee's agreement not to progress those claims through the courts. The arrangement is recorded in writing in a settlement agreement.

Employers should ask the employee to take their own independent legal advice about the terms of the agreement, so that there is no question of the employer placing the employee under duress to sign a settlement agreement. This is necessary for the agreement to have binding effect.

Businesses may decide to offer severance packages in a variety of situations. For instance if the business is downsizing and needs to conduct a redundancy programme, then it may offer an enhanced termination package to obtain the employee's agreement not to make a claim of unfair dismissal. Or if an employee has made allegations of discrimination or wrongful dismissal or in connection with a transfer of a business, then rather than defend the claim in tribunal the employer may decide to put an offer of settlement.

Subject to conditions, settlement offers can also be made on a confidential basis where there is no dispute between the parties. Either the business or the employee can promote these discussions. However, settlement agreements are voluntary, so neither party has to enter into them if they do not wish to do so.

Consult the rest of our guide for information on how much compensation and when the employee is to take legal advice.

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