A settlement agreement, formerly known as a compromise agreement, is a legally binding contract between an employer and an employee which sets out the terms upon which an employee will have their employment terminated. In practice, this usually means that the employee agrees to waive any potential claims against the employer (such as employment, discrimination and breach of contract claims) in return for receiving a termination payment. Processes that are costly or time-consuming for an employer to conduct, such as those relating to redundancy, discipline or grievances, can often lead to the offer of a settlement agreement, in an attempt to ensure a quick and clean break for both parties.

An employee is under no obligation to accept the agreement, and it can only be binding once the employee has received advice from an independent employment law solicitor. The role of the solicitor is to ensure the agreement does not place the employee at a significant disadvantage, and clarify what potential claims the employee may have against the employer if any. In some circumstances, the solicitor may be able to negotiate a better deal for the employee, particularly if they have a potentially strong claim against the employer.

Once an employee has a draft agreement in front of them, there are many aspects to a settlement agreement to consider and take advice on, such as:

• The date of termination, and reason for the same;
• The termination payment, and its tax implications;
• Notice requirements and possible payment instead of notice;
• Bonus payments, shares and pensions;
• An agreed job reference;
• Post-termination and confidentiality restrictions; and
• The waiver of potential claims.

Settlement agreements can be controversial, as employees can feel they are being ‘paid off’ in return for a quiet exit on any workplace issues. Most settlement agreements do contain extensive confidentiality clauses. However, employees should be aware that, under the Employment Rights Act 1996, nothing can prevent them from making a protected disclosure (‘whistleblowing’) – for example, about criminal offences, health and safety or damage to the environment.

It can be a surprise to be on the receiving end of a settlement agreement, but there can be benefits, for both parties. The employee has the security of an agreement setting out what arrangements will be made on termination, including what financial settlement will be received. The employer, meanwhile, has the guarantee that they will not have to deal with future legal action by the employee. Although not always amicable, a settlement agreement is often a way of ensuring that the parties end the employment relationship on an equal footing, and get to make a fresh start.

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