Settlement Agreement is a legally binding contract in UK employment law that allows an employer and employee to end their working relationship on agreed terms. Often used as an alternative to lengthy disciplinary, redundancy, or performance procedures, it provides certainty for both sides while protecting the employer from potential tribunal claims and giving the employee a negotiated exit package.
Because of this, employers are often required to follow strict disciplinary, capability or redundancy procedures if they want to avoid unnecessary Employment Tribunal claims and the costs of defending them. For context, a single unfair dismissal claim could cost up to £94,000, and compensation in discrimination cases has no upper limit.
What is a settlement agreement?
Within UK employment law, a settlement agreement (previously called a compromise agreement) is a legally binding contract that allows an employer and employee to part ways on agreed terms. It provides a protected method of ending employment without the need for drawn-out disciplinary, capability or redundancy procedures.
Typically, the employer offers a severance payment and in return, the employee agrees not to pursue legal claims relating to their employment or its termination.
Important: This type of agreement is only valid if the employee receives independent legal advice before signing.
Why are Settlement Agreements Used?
For employers, these agreements offer a quicker and more certain resolution than formal procedures. Beyond financial compensation, they can also include commitments such as:
- Agreed reference wording for future job applications.
- Confidentiality about the agreement’s terms.
- A clause preventing negative comments about the company.
When Might an Employer Use One?
Employers may consider a workplace settlement in situations such as:
- Redundancies where the business is concerned about potential legal challenges.
- Avoiding long redundancy consultations or dismissal processes.
- Underperformance cases, where the company wants to end employment without lengthy performance reviews.
Under what circumstances might an employer use a settlement agreement?
Settlement agreements are used by employers in numerous situations; for example, when they have concluded that a group of their employees need to be made redundant:
- The employer is worried about the grounds being used for making them redundant; or
- The length of time it will take to go through a legal employment law procedure, involving warning times, and joint and individual discussion before notice can be given.
- Can be used for underperforming employees who would otherwise need to go through a proper performance improvement strategy – but the employer wishes to terminate the contact before this time.
Risks for Employers
Offering an agreement is not risk-free. Problems can arise if:
- It is presented suddenly without previous discussions about performance or conduct.
- The employee has a protected characteristic (e.g. disability, pregnancy, race, age) and alleges discrimination. In such cases, the discussions and documents may not be legally protected.
What Happens if the Agreement is Breached?
If the employer fails to pay the agreed sum on time, the employee may bring a claim in the civil courts or, in certain cases, the employment tribunal. Likewise, if an employee breaches confidentiality or non-disparagement clauses, the employer may seek legal enforcement.
FAQs on Settlement Agreements
Contact MAR Legal in Manchester For Advice on Your Settlement Agreement
If you have received a settlement agreement, you will need to make sure you receive legal advice on it. Contact MAR Legal for legal employment advice today. We advise clients throughout the UK on Settlement Agreements.