Settlement Agreements – what you need to know


Settlement agreements play a crucial role in employment law whether they are used as a means to bring the employment relationship to an end or to settle a claim once employment tribunal proceedings have been issued. Unlike litigation, settlement agreements offer flexibility in crafting solutions that meet the unique needs and interests of both parties.

In this article, we will explore the key aspects of settlement agreements, their purpose, and how they impact both parties involved.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract entered into voluntarily by both the employer and employee. It typically occurs when an employment relationship is being terminated or when a dispute arises. The agreement outlines the terms and conditions agreed upon by both parties, providing a resolution to the issues at hand.

A settlement agreement must comply with the following requirements in order to be legally binding:

  • It must be in writing.
  • It must relate to the particular complaint or particular proceedings about which there is a dispute.
  • The employee / recipient must have received independent legal advice from a solicitor or other appropriately qualified advisor, as to the terms and effect of the proposed agreement.
  • The advisor must be identified in the agreement and must have in force a professional indemnity policy to cover the risk of giving negligent advice.
  • The agreement must state that the above conditions relating to settlement agreements have been satisfied.

Purpose of Settlement Agreements

Firstly, they enable employers and employees to reach a mutually acceptable resolution thereby avoid the uncertainty and cost associated with prolonged legal battles. It allows for a timely resolution, saving time, money and stress. Unfortunately, it takes on average 12 to 24 months for a case to proceed to a final hearing before an Employment Tribunal. This lengthy timescale is generally in neither parties interest.

Additionally, settlement agreements provide a level of confidentiality, protecting both parties from public disclosure of the details of the dispute, the terms of and the existence of the agreement. A settlement agreement also provides a means for employees to secure a financial settlement or other beneficial terms when leaving their employment.

Unlike litigation, settlement agreements offer flexibility in crafting solutions that meet the unique needs and interests of both parties. It can include an agreed reference, an apology, non-disparagement clauses, or even future cooperation possibilities.

Key elements of a Settlement Agreement

A comprehensive settlement agreement typically includes several key elements. These may include:

  1. Termination details: It will include the termination date and whether the notice will be worked of payment in lieu of notice received 
  2. Financial compensation: The agreement will set the amount and when the payment will be received
  3. Confidentiality obligations
  4. Restrictive covenants: Specifying any post-employment restrictions or non-compete clauses.
  5.  References: This might be an agreed reference or an agreement for the employer to provide a standard factual reference.
  6. Tax implications: An individual maybe able to receive up to £30,000 exempt from tax, provided that it is a purely compensatory sum.
  7. Waiver of claims: Perhaps the most important part of the settlement agreement from an employer’s point of view. It will set out the employee agrees to waive their rights to pursue legal action against the employer regarding those claims waived.

Voluntary Nature and Independent Legal Advice

As noted above, to ensure the settlement agreement is valid, both parties need to enter into it voluntarily and with full understanding of its implications. Employees are required to seek independent legal advice before signing the agreement. It is common practice that employers make a contribution to the employees’ legal fees so that they can take advise on the agreement. This contribution can vary between employers and the issues involved.

Negotiation Process

Negotiations around settlement agreement are usually undertaken on a ‘without prejudice’ basis  or during a ‘protected conversation’. This provides open communication between the parties with the aim to find a mutually agreeable outcome. Negotiations may centre around the monetary sum(s) payable under the agreement, the wording of a reference or the release or otherwise from restrictive covenants.


Settlement Agreements can be a valuable tool for resolving disputes efficiently and confidentially. Once a settlement agreement is reached, it brings closure to the dispute. It provides control to both parties rather than leaving a decision in the hands of an Employment Tribunal. Both parties can move forward, focusing on their respective goals and avoiding any prolonged emotional or financial strain.

Our Employment Team is experienced in advising on and negotiate the terms of a settlement agreement for all levels of seniority. The Team also has a wealth of experience in advising employers on the use of settlement agreements, the drafting and negotiating the terms of a settlement agreement.

The above is meant to be only advice and is correct as of the time of posting. This article was written by Alex Pearce, Senior Associate in the Employment Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2023



Alex Pearce

Senior Associate

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