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Settlement agreements, formerly known as ‘compromise agreements’, are a special type of legally binding contract entered into between an employer and employee, shortly before termination of employment. Essentially, upon signing a settlement agreement, an employee waives their statutory (and other) rights to bring any potential claims before a court or tribunal, often in return for a settlement payment which may be more than they would
be contractually entitled to.

There are a range of situations where a settlement agreement might be desirable for the employer as well as an employee. They can be used as a way of resolving an ongoing dispute or a breakdown in relationship where a clean break is needed. They will often be used in a voluntary redundancy situation; there is therefore no requirement for a disciplinary process or a breakdown in relations – such agreements are often the most appropriate way to tie up loose ends for both parties.

While settlement agreements are not a replacement for good management, they should be considered as one of many "tools" in the employer's toolkit, to be used when appropriate.

As it is an agreement which is waiving statutory rights, it must adhere to a number of specific legal requirements to be valid: Firstly, it must be in writing.

Secondly, it must refer to the specific legal claims that are to be waived and there is a wide range of potential claims that can be brought to an employment tribunal (or court) by an employee. The employer may be tempted to include a blanket ‘catch all’ clause attempting to cover all possible claims at once, but due to their unspecific nature, such clauses are at risk of being challenged later and do not comply with the legal requirement here.

Thirdly, the employee must have received independent legal advice on the terms and effect of the proposed agreement on the employee’s ability to pursue any claims.
The independent adviser is named in the agreement and must have the appropriate indemnity insurance.

Finally, the agreement must state that the conditions regulating the settlements under relevant law have been satisfied. If any of these requirements are not met, the agreement will not legally protect the employer against most employment tribunal claims.

The independent adviser is usually a qualified lawyer, such as a solicitor. There is a small group of alternative advisers that are legally acceptable; examples include certain barristers and trade union officials that have been certified to advise on such agreements. To ensure that independent advice is obtained, the employer will usually pay a fixed amount towards the employee’s
legal costs.

From the employer’s perspective, there are numerous provisions to include to protect the employer’s position. Examples include: a statement from the employee that the claims covered by the agreement are the only ones they have; a requirement for the employee to indemnify the employer if the employee breaches the agreement or brings a claim and the employer suffers a loss as a result; a contractual promise from the employee not to make derogatory statements about the employer; obligations around keeping the terms and existence of the settlement agreement confidential.

If the employer is worried about a departing employee setting up a rival company, for example, the agreement may restrict the employee’s ability to compete with the employer’s business for a period (such provisions are sometimes already included within the employee’s contract of employment). There are numerous provisions that can be included that may justify the use of a settlement agreement as an appropriate choice. In return, along with a financial payment (usually) an employer may also provide an agreed reference.

While settlement agreements are not a replacement for good management, they should be considered as one of many ‘tools’ in the employer’s toolkit, to be used when appropriate.