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What are settlement agreements?

Formerly known as compromise agreements, Settlement agreements are legally binding documents which set out mutually agreed terms and conditions to bring an employment relationship to an end.

They are designed to enable an employee and their employer to settle any employment claims which arise under statute (eg a claim for unfair dismissal or unlawful discrimination) or under their contract (eg a claim for notice pay) which otherwise may have resulted in a potential employment tribunal claim or other court proceedings.

Key Features

The requirements for a settlement agreement are set out in employment legislation and certain conditions must be covered….

Full and final settlement

- The effect of full and final settlement is that by signing the agreement for the employee, there will be no returning to dispute matters further or pursue subsequent payment once the agreement has been signed by both parties.

- It is important that the agreement clearly identifies the legal claims to be settled in full and final settlement as the employee will agree to waive their rights to bring any claim against their employer covered by the agreement. These could be arising out of or in connection with their employment or its termination, potentially including claims the employee was not considering to bring and claims which arise in the future or claims that the employee is not aware they might have.

- Some claims, including latent personal injury or pension claims against an employer will be unable to be waived by a settlement agreement.

Payments to the employee

- This can include a termination payment by way of compensation for the loss of the employees employment, as well as notice pay, untaken holiday pay and bonuses.

Termination Date

- This will stipulate the date when the employees employment will end, and whether the employee will be required to work a notice period.


- Any benefits to the employee continuing after the settlement agreement will also be dealt with. These could include any incentive, or bonus schemes and share options.


- The agreement may deal with an agreed reference which the employer will send on the employees request.


- The agreement will stipulate how the payments made to the employee will have tax deductions and who will be liable for further tax.


- These clauses will require the employee to stop using, copying or disclosing information that they have obtained through their employment.

Company Property

- Employers can require the employee to return property they have been provided through their employment, such as laptops, phones etc.

Legal fees

- As having a settlement agreement is usually more to the employers benefit than the employees, it is normal for the employer to meet (or at least contribute a fixed amount to) the costs of the employee’s legal fees.

‘Bad mouthing’

- The agreement will normally require the employee to agree not to talk in a negative way about the employer and their staff, and the employer will usually agree the same to the best of their abilities.



They can provide an easy end to an employment relationship which is no longer working. They can avoid the time, cost and stress involved for both parties in bringing a claim. They can also, for the employee provide compensation and or other benefits, such as a reference.



If used as a substitute for good workplace management practices, they can create tensions within the wider workforce. They can create a potential risk to the relationship with the individual employee if settlement is not agreed. There is also the cost of paying an agreed sum to the employee.


When can an offer be made?

There is no legal requirement for there to be a disciplinary process before a settlement agreement can be offered, they can be proposed at any stage of an employment relationship. It should be considered by the employer whether or not a settlement agreement is the most appropriate way to resolve a workplace issue, as some problems with employees can be resolved through constructive conversation.

Employers should instigate a discussion with the employee and make clear their reasons why they are making an offer of a settlement agreement. A series of meetings or an offer in writing can help clarify and prevent misunderstandings. The final agreement should be reflective of what has been previously discussed. Although not a legal requirement, if the employee wants to involve someone else in discussions, employers should allow them to be accompanied by either a work colleague, or a trade union official.

If a settlement agreement is agreed, any discussion about the proposed agreement will be inadmissible in legal proceedings. Discussions will also not have any effect on any disciplinary or performance management procedure in the event a settlement agreement is not reached.


The following are checklists recommended by ACAS (the Advisory, Conciliation and Arbitration Service) for both employees and employers to consider regarding settlement agreements.

Checklist for employees who have been offered a settlement agreement.

- Are you aware of the reason your employer is offering you a settlement agreement?

- Have you considered the potential implications of agreeing a settlement agreement? such as your ability to bring claims against your employer arising out of your employment or as a result of its termination? Potentially including claims you were not considering to bring and claims which may arise in the future or claims that you were not aware they might have.

- Have you considered the potential implications for future employment? Such as the advantages of securing an agreed reference.

- Are you clear about what the possible alternative outcomes might be if a settlement agreement is not reached?

- Do you understand the admissibility provisions relating to settlement agreement discussions? Such as normally negotiations cannot be used as evidence in any subsequent unfair dismissal claim.

- Do you know that settlement agreements are voluntary? And that you do not have to enter into them if you do not wish to do so?


Checklist for employers proposing a settlement agreement.

- Have you considered the reason you are offering an employee a settlement agreement, is it the most appropriate way to deal with this issue?

- Have the implications for the employment relationship been considered if an agreement cannot be reached? And the implications for the wider workforce?

- Is it clear that there are no unlawful discrimination or victimisation involved in offering a settlement agreement in the circumstances?

- Have you considered whether a financial payment should be made? And if you are offering a financial payment, is it appropriate?

- Have you considered how you are going to raise the issue with the employee in a sensitive manner? And what information will you tell the employee to allow them to make an informed decision regarding their options?

- Will it be useful to arrange a series of meetings, to discuss the proposal with the employee. And will you ask if the employee would like to be accompanied to any of the meetings?

- Do you understand the admissibility provisions relating to settlement agreement discussions in employment tribunals and courts, and is the employee also aware of these provisions.

- Have you considered a reasonable time scale in the circumstances for any discussions and negotiations.


Time allowed to consider an offer of a settlement agreement.

As a general rule, the ACAS code of practice on settlement agreements states a minimum period of 10 calendar days should be allowed to the employee to consider the proposed formal written terms of the settlement agreement and to receive independent legal advice.

An agreed timetable could be helpful to plan discussions, allow parties time to take independent advice and to consider offers.

In some circumstances, by not allowing a reasonable time, discussions concerning the settlement agreement can be referred to as evidence in subsequent unfair dismissal claims before an employment tribunal.


If you are an employee who has received a settlement agreement and you require independent legal advice, or you are an employer considering proposing a settlement agreement, please don’t hesitate to reach out to us at DPA Law.

Our contact details are as follows:

Ammanford: 01269 500591

Cardiff: 02920 091092

Llanelli: 01554 749144

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