Understanding Settlement Agreements: What You Need to Know

Settlement agreements (formerly known as compromise agreements) play a crucial role in resolving workplace disputes and ensuring a smooth exit for employees. This guide outlines what settlement agreements are, their key features, and how they benefit both employees and employers.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract that resolves disputes between an employee and their employer. Commonly used when an employee leaves their role, it allows both parties to agree on terms without resorting to employment tribunals or litigation. These agreements are often used during voluntary redundancy arrangements or to settle grievances amicably.

Key Features of Settlement Agreements:

Voluntary Nature: Settlement agreements are entirely voluntary. Both the employee and employer must agree to the terms without coercion, ensuring a mutual resolution that allows both parties to move forward confidently.

Full and Final Settlement: By signing a settlement agreement, the employee waives the right to bring claims against the employer related to their employment or its termination. This clarity benefits employers seeking closure and employees seeking certainty about their exit.

Common Provisions in Settlement Agreements
While terms can vary, most settlement agreements include the following provisions:

Termination Date: The agreement specifies the date on which the employee’s employment will officially end.

Notice Period Options: The agreement outlines whether the employee will:

• Work their notice period,
• Be placed on garden leave (remain on payroll without working), or
• Receive pay in lieu of notice.

Payment for Accrued Holiday: Employees must be compensated for unused holiday entitlement. The agreement will detail whether the employer pays for accrued holiday or requires the employee to take it before their termination date.

Termination Payment: This payment, often called an ex-gratia payment, compensates the employee for their departure. The amount varies based on factors such as length of service and the nature of the dispute.

Confidentiality Clauses: Confidentiality clauses are a standard feature, safeguarding sensitive information by preventing both parties from disclosing:

• The circumstances leading to the agreement, and;
• The terms of the settlement

These clauses protect the employer’s reputation and reduce the risk of similar claims, while also ensuring the employee’s privacy.

Factual References: Settlement agreements typically include an agreed reference that is factual and objective. This reference usually confirms the following:

• Employment start and end dates, and;
• Job titles held by the employee

Factual references reduce the risk of defamation claims and support the employee’s future job prospects.

The Importance of Independent Legal Advice

Employees are required to seek independent legal advice before signing a settlement agreement. This ensures they fully understand their rights and the implications of the agreement. Employers often contribute to the employee’s legal costs to support this process and uphold the agreement’s validity.

Conclusion

Settlement agreements are invaluable tools for resolving workplace disputes and facilitating amicable employee departures. They provide clarity, protect both parties’ interests, and minimise the risk of litigation. 

Understanding their key features can help employees and employers confidently navigate the process.

Get in Touch

If you need assistance with settlement agreements, our Employment Litigation Team is here to help. Whether you are an employer looking to create a settlement agreement or an employee seeking advice, review, or negotiation support, we can guide you through the process.

• Phone: 023 8063 9311
• Email: enquiries@warnergoodman.co.uk