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Settlement Agreements for Employers

settlement agreement


Settlement agreements offer employers and employees a way to end employment on mutually agreed terms.

Effective use of these agreements can help employers mitigate risks, protect company interests, and maintain a positive workplace environment. They also ensure that any potential claims are resolved without the need for lengthy and costly legal proceedings.

However, for a settlement agreement to be legally binding and effective, there are several requirements that must be met, as well as practical considerations for employers when negotiating settlements.

In this guide for employers, we set out the practical and legal considerations when using settlemets agreements. With a clear grasp of how settlement agreements work, employers can handle delicate situations more effectively, ensuring compliance with legal standards and maintaining their reputation.


Section A: Overview of Settlement Agreements


Settlement agreements are a valuable tool for employers to resolve disputes and terminate employment relationships under agreed terms through a more amicable process. They offer a structured and legally recognised way to resolve disputes and end employment relationships in a way that safeguards reputation.


1. What is a Settlement Agreement?


A settlement agreement, also known as a compromise agreement, is a legally binding contract between an employer and an employee used to resolve or avoid a workplace legal dispute between an employee and their employer by terminating the employment on agreed terms.

Settlement agreements usually set the terms of contract termination with an agreed severance payment given to the employee in exchange for certain requirements, such as waiving rights to bring future claims against the employer and agreeing to keep the terms of the agreement confidential in exchange for a financial settlement.

Settlement agreements can provide a clean break for both parties, avoiding the uncertainties and costs associated with employment tribunals.


2. Legal Framework in the UK


In the UK, settlement agreements are governed by specific legal requirements under employment law. For a settlement agreement to be valid, the employee must receive independent legal advice, and the agreement must be in writing and relate to specific complaints or proceedings. Additionally, the adviser must be identified, and their advice must be covered by insurance.


3. Benefits of Using Settlement Agreements


Settlement agreements can be particularly useful in situations when no legal action has yet been taken and no actual disagreement exists between the parties.

Where this a dispute, reaching a legally enforceable settlement agreement may have the benefit of requiring no engagement from Acas or any other external entity to bring the matter to a conclusion without further recourse or risk of litigation.

The settlement agreement will also be a separate, legally binding contract between the parties that may be upheld in court just like any other contract.

Settlement agreements provide legal certainty by clearly defining the terms under which the employment relationship ends and preventing future claims. This ensures that both the employer and the employee have a clear understanding of their rights and obligations, thereby reducing the risk of legal disputes arising after the agreement is signed.

By avoiding lengthy legal disputes and employment tribunal hearings, settlement agreements save both time and money. This efficiency benefits employers by minimising disruption to the business and reducing legal costs, while employees receive timely compensation and clarity on their situation.

Confidentiality clauses in settlement agreements protect sensitive information and maintain the company’s reputation. These clauses prevent either party from disclosing the terms of the agreement or details of the dispute, which can be crucial in protecting business interests and ensuring a respectful departure for the employee.

Settlement agreements ensure that both parties mutually agree to the terms, which significantly reduces the likelihood of future conflict. This mutual consent fosters a more amicable resolution and helps maintain a professional relationship, even after the employment ends.

Settlement agreements provide clear terms regarding final payments, notice periods, and post-employment obligations. This clarity ensures a smooth transition for the employee and helps the employer manage the departure in an orderly manner, reducing the potential for misunderstandings or disputes later on.


4. Mitigating Potential Risks


Depending on the circumstances, settlement agreements can present certain risks. These can be avoided through proactive strategies such as:


a. Perception of Unfairness

Employees may perceive the agreement as unfair, leading to dissatisfaction or negative publicity. To mitigate this risk, ensure the agreement is fair and reasonable, and provide adequate compensation. Engage in open and transparent communication throughout the process to foster understanding and acceptance.


b. Legal Challenges

An improperly drafted agreement might be challenged in court, leading to potential legal battles. To avoid this, use experienced legal professionals to draft and review the settlement agreement, ensuring compliance with all legal requirements. This not only strengthens the agreement’s validity but also reduces the likelihood of costly legal disputes.


c. Employee Relations Impact

The use of settlement agreements might affect morale and trust among remaining employees. To mitigate this impact, handle the process sensitively and professionally. Provide clear communication to remaining staff about the reasons for the settlement to maintain trust and morale, ensuring that the process is perceived as fair and transparent.


d. Financial Costs

Offering settlement agreements can be costly, especially if multiple agreements are required. To manage these costs, weigh the expenses against the potential costs of legal disputes and tribunals. Use settlement agreements judiciously and only when truly beneficial to both the company and the employee.


e. Non-Disclosure Agreements (NDAs)

Overuse of NDAs in settlement agreements might attract negative attention or be viewed as silencing employees. To mitigate this, use NDAs appropriately and ensure they are balanced with transparency and fairness. Be prepared to justify their use if questioned, emphasising the importance of protecting sensitive information while maintaining ethical standards.

Section B: When to Use a Settlement Agreement


The parties to an employment-related disagreement will frequently want to avoid incurring the expense, uncertainty, and time associated with filing/replying to an employment tribunal claim or, in the event that a claim has been filed, going to a full tribunal hearing.

When a disagreement first occurs, before the claim or answer is submitted, or at any other time throughout the employment tribunal process, negotiations to resolve the claim or potential claim may be made (including during any period between determination of liability and remedy).

As such, settlement agreements are widely used by employers as a standard approach to avoiding or settling workplace disputes.

In theory, they can be offered at any time during the employment relationship, or afterwards.

Where there is an actual or potential employment law claim against an employer, and attempts to resolve the issue through internal processes or alternative methods have failed or are not appropriate, a settlement agreement is often used to bring the matter to a close by terminating the employee’s contract of employment on mutually agreeable terms.


1. Common Scenarios for Employers


Settlement agreements are commonly used to avoid claims such as unfair dismissal resulting from redundancy processes and performance management; constructive dismissal during misconduct investigations; or following a discrimination grievance. They can also be used to settle an employment tribunal claim at any stage during the proceedings.

While typically used to bring an employment contract to an end, they can also be used as a method of dispute resolution to resolve an ongoing workplace dispute while the employee remains employed.

Common scenarios when settlement agreements are used include:


a. Redundancy Situations: When making redundancies, employers can use settlement agreements to provide clarity and security for both parties. This helps avoid potential claims related to unfair dismissal or redundancy pay.


b. Disciplinary Actions: If an employee faces serious disciplinary action, a settlement agreement can offer a way to part ways without escalating to a tribunal.


c. Performance Issues: When an employee consistently underperforms, a settlement agreement can be a practical solution to end the employment relationship without lengthy performance management processes.


d. Workplace Disputes: In cases of interpersonal conflicts or harassment claims, settlement agreements can resolve issues without further damaging workplace morale or reputation.


e. Long-term Sickness Absence: For employees on long-term sick leave, a settlement agreement can be used to agree on terms for ending employment amicably, especially if a return to work is unlikely.


f. Mutual Agreement: Sometimes, both employer and employee may simply agree that ending the employment relationship is the best course of action. A settlement agreement can formalise this understanding.


2. Settlement Agreements & Contracting Out Provisions


The majority of claims that can be filed before the employment tribunal derive from statutory provisions. Each of these sets of statutory provisions will contain terms preventing the parties (or potential parties) to an employment tribunal claim from coming to an agreement that would purport to resolve the claim and, in doing so, would purport to remove the employment tribunal’s authority to decide the dispute. These clauses, which are commonly referred to as “contracting-out provisions,” can be found in a number of employment laws, such as the ERA 1996, the Trade Union and Labour Relations (Consolidation) Act of 1992, and the Equality Act of 2010. (EqA 2010). By prohibiting claimants (or potential claimants) from signing away their right to bring a claim without proper protections having been respected, they are intended to protect claimants (or potential claimants).

The contracting-out clauses operate by enforcing the fundamental principle that any agreement established between parties that claims to preclude a person from filing or pursuing a claim with an employment tribunal is void to that extent.

However, there are two possible exceptions that are potentially available to these contracting-out rules. Provided one of the following applies, it is permissible for the parties to settle and avoid tribunal litigation:


a. The agreement has been reached with support from an ACAS officer following ACAS Early Conciliation, or

b. The agreement complies with the statutory requirements for a legally binding settlement agreement.

3. Claims which Cannot be Settled by a Settlement Agreement


It is not possible to use a settlement agreement to contract out in relation to the following types of claims:


a. Certain claims under TUPE, including failure to inform and consult and failure to notify employee liability information

b. Certain claims under the Agency Workers’ Regulations 2010 including those in relation to breaching rights to basic working and employment conditions and access to vacancy information

c. Certain claims under TULR(C)A 1992, for failure to comply with the duty to consult employee representatives on a collective redundancy

In addition, by law, employees cannot contract out of the right to receive certain statutory entitlements and payments, including statutory sick pay (SSP), statutory maternity pay (SMP), statutory paternity pay (SPP), statutory adoption pay (SAP), statutory shared parental pay (SSPP), and statutory parental bereavement pay (SPBP).


Section C: Key Components of a Settlement Agreement


A well-drafted settlement agreement ensures the terms are legally binding on both parties.

While specific circumstances may require specific clauses and terms, in general, settlement agreements would typically include the following:


1. Termination Details

The termination details of a settlement agreement include the notice period, the last working day, and any handover responsibilities. The notice period specifies the length of the notice period or if payment in lieu of notice (PILON) will be made. This ensures clarity on how long the employee will continue working or when they will receive their final payment. The last working day is clearly stated to provide a definitive end date for the employment. Additionally, the agreement outlines any handover responsibilities or duties the employee must complete before leaving, ensuring a smooth transition and minimal disruption to the business.


2. Compensation

Compensation terms cover the settlement payment, payment schedule, and benefits continuation. The settlement payment details the total amount to be paid to the employee, including any tax-free elements. This ensures that the employee knows exactly what financial compensation they will receive. The payment schedule specifies when and how the settlement payment will be made, providing a timeline for the employee to expect their funds. Furthermore, the agreement states any continuation of benefits, such as health insurance or pensions, for a specified period post-termination, offering additional security to the departing employee.


3. Confidentiality

Confidentiality clauses include the non-disclosure of agreement terms, confidential information, and the scope and duration of confidentiality obligations. These clauses ensure that both parties agree to keep the terms and existence of the agreement confidential, preventing any disclosure of sensitive information obtained during the employee’s tenure. The agreement specifies the duration of the confidentiality obligation and the scope of the information covered, providing clear boundaries for both parties.


4. Non-disparagement

Non-disparagement clauses involve mutual non-disparagement and reputation protection. Both parties agree not to make negative or harmful statements about each other, helping to maintain professional reputations. This is crucial for protecting the company’s reputation and the employee’s future job prospects, ensuring that both parties can move forward without lingering negativity.


5. Future Claims

The agreement addresses future claims through the waiver of claims, excluded claims, and legal advice confirmation. The employee agrees to waive their right to bring any future claims related to their employment or its termination, providing the employer with security against potential legal actions. However, the agreement also lists any claims that cannot be waived, such as accrued pension rights or personal injury claims that are unknown at the time of signing. This ensures that both parties are aware of the limitations. Additionally, the agreement confirms that the employee has received independent legal advice on the implications of waiving future claims, ensuring informed consent.


6. References

Reference provisions include a standard reference letter, content and format, and the obligation to provide references. The agreement provides a mutually agreed-upon reference letter that the employer will supply to future prospective employers, ensuring consistency and fairness. It details the content and format of the reference to avoid future disputes and states the employer’s obligation to provide the reference upon request, guaranteeing that the employee receives a supportive reference.


7. Additional Essential Clauses

Other essential clauses in the settlement agreement cover tax indemnity, return of company property, legal fees contribution, the entire agreement clause, and governing law.

The tax indemnity clause ensures the employee is responsible for any tax liabilities arising from the settlement payment, protecting the employer from future claims by tax authorities.

The return of company property clause requires the employee to return all company property, such as laptops, phones, and documents, by a specified date, ensuring company assets are recovered.

The legal fees contribution clause specifies whether the employer will contribute to the employee’s legal fees incurred for advice on the agreement, promoting fairness.

The entire agreement clause states that the settlement agreement constitutes the entire agreement between the parties, superseding any prior agreements or understandings, ensuring clarity and finality.

Finally, the governing law clause specifies that the agreement is governed by the laws of England and Wales, providing a clear legal framework for the agreement.

Section D: Legal Requirements


Settlement agreements in the UK are governed by the Employment Rights Act 1996 and relevant case law. If these requirements are not met, the agreement may be rendered invalid and the terms unenforceable.


1. Requirements to Make Settlement Agreement Legally Enforceable


Employers must adhere to specific guidelines to ensure the agreement is legally binding and enforceable.


a. Written Agreement

The settlement agreement must be in writing to be legally binding. This formal document serves as a record of the terms agreed upon by both parties, providing clear evidence of the agreement’s existence and its specific terms.


b. Specified Claims

The agreement must clearly specify the claims being settled, ensuring that the employee is aware of what rights they are waiving. This clarity helps prevent future disputes and ensures both parties have a mutual understanding of the scope of the agreement.


c. Independent Legal Advice

The employee must receive independent legal advice from a qualified adviser on the terms and effect of the agreement, particularly on the waiver of their rights to bring claims. This step is crucial to protect the employee’s interests and to ensure that the waiver of rights is informed and voluntary.


d. Qualified Adviser

The adviser providing independent legal advice can be a solicitor, certified trade union representative, or a certified adviser working at an advice centre. This qualification ensures that the employee receives competent and professional advice regarding the agreement.


e. Adviser Identification

The agreement must identify the adviser and confirm that their advice is covered by professional indemnity insurance. This identification provides accountability and assurance that the advice given is reliable and protected.


f. Compliance Check

Employers should regularly review their settlement agreement templates to ensure they reflect current laws and best practices. Regular reviews help maintain the validity and relevance of the agreements.


g. Updates and Amendments

Keep up-to-date with changes in employment law to ensure continued compliance. Employment law is dynamic, and staying informed about new regulations and legal precedents is essential for maintaining compliant agreements.


h. Internal Policies

Align the settlement agreement with internal policies and procedures to maintain consistency and legal compliance. This alignment helps integrate the agreement seamlessly into the organisation’s overall HR strategy and legal framework, ensuring that it supports and reflects the organisation’s established practices.


2. Importance of Fair and Reasonable Terms


Fair and reasonable terms are essential to the enforceability and acceptance of the settlement agreement. When both parties perceive the agreement as fair, it is more likely to be upheld and respected, reducing the risk of future disputes.

Ensure that the financial settlement and other terms are equitable and reflect the circumstances of the termination. This means considering factors such as the employee’s length of service, role, and the reasons for termination, ensuring that the compensation and terms are just and appropriate.

The agreement should be presented in a manner that avoids any appearance of coercion or undue pressure on the employee. It is crucial that the employee feels they are entering into the agreement voluntarily and with a full understanding of its implications.

Any agreed payout for signing a settlement agreement will depend on a number of factors, including:


a. Contract terms

b. Whether the employee has a valid claim

c. The reason for contract termination

d. Employee conduct and whether they have done anything wrong

e. Parties’ objectives – for a swift, clean break or to risk and hold out for maximum payout

f. How settlement negotiations are handled

Any offer should be broken down into constituent parts so that parties can understand how the calculation has been arrived at and whether it is fair in the circumstances. Usually, this would include:


a. Loss of office compensation

b. Notice payment, accrued holiday pay

c. Bonuses & commissions owed

d. Loss of pension

e. Private insurance

Some types of claims command higher compensation, for example, there is no cap on the amount of compensation a tribunal can award for discrimination claims, making the financial value potentially greater than other claims, such as unfair dismissal where a limit applies.

In cases of compulsory redundancy, where the employee’s position is not going to be replaced and there is no suitable alternative employment, settlement will usually be limited to the statutory levels, for example, if they have more than two years’ continuous service, they can expect between 1 and 3 months’ gross salary payment.

In some circumstances, for example, where there are potentially legal or reputational risks for the employee, the employer may be able to negotiate termination without a payout, or where the employee makes payment to the employer in favour of a clean break and the employer waiving their rights to bring future claims against the employee.


3. Signing the Settlement Agreement


Settlement agreements are voluntary. Employees are under no legal obligation to sign a settlement agreement. Employers are not allowed to coerce or force employees to agree and sign.

Employees are required to seek independent legal advice prior to signing an agreement.

Note also that conduct during the settlement negotiations may be scrutinised should the matter proceed to the employment tribunal. Should the employee reject a reasonable offer, they could risk costs awards being made against them by the tribunal.

Section E: Negotiating a Settlement Agreement


Effective negotiation can prevent disputes from escalating and help both parties reach a mutually beneficial agreement without recourse to litigation.


1. How to Approach Negotiations


Most employment disputes are resolved by simple negotiation, without resorting to any formal mechanism for resolution. In the majority of cases, monetary compensation is the only realistic form of redress employees can expect to receive for the wrongs they have suffered in the workplace. Tribunals are quick to recognise the futility of ordering two parties to resume working together where good relations have broken down. For that reason, reinstatement and re-engagement orders are rarely made.

Settlement becomes more likely once an ex-employee has come to accept that they can’t turn the clock back or force their employer to reconsider its decision and that, therefore, monetary compensation is generally the principal remedy available.

However, there may be other loose ends to tie up, too, such as the return of property and the giving of references, but the primary focus of settlement will be on money. Employees who seek to retrieve their reputation or publicise their former employer’s wrongdoing in the public forum of a tribunal cannot easily be brought to the negotiating table.

Good negotiating involves a certain amount of acting. It depends on the ability to read the other party’s true position from what they tell you, give clear (and possibly misleading) signals about your own intentions, which the other party perceives to be your true position, manage the expectations of your own client as well as the other party’s as to what a settlement will involve, recognise what the other party needs to get from the settlement in order to recognise it as a fair deal (or a ‘win-win’ solution), maintain emotional detachment and objectivity in order to prevent any personal acrimony from developing between solicitors and, as far as possible, reduce any personal acrimony between the parties.

In many situations, the difficulty with negotiation lies not in finding an acceptable middle ground but in getting both sides to recognise that ground as an acceptable middle ground when they get there. Too often, false expectations are raised by inflated claims or derisory offers from either side or by inconsistency in approach (for example, a ‘final offer’ which does not end up as the best or final offer).

A solicitor’s role in negotiation is best understood as being to promote their own client’s interests by cooperating with the other party’s solicitor.

Advisers will need to consider whether negotiations will become admissible in any subsequent employment tribunal and/or civil court proceedings.

2. Acas statutory Code of Practice on Settlement Agreements


The purpose of the Acas statutory Code of Practice on Settlement Agreements is to assist employers, workers, and their advisers in understanding the consequences of the ERA 1996’s Section 111A’s prohibition on pre-termination conversations.

The Foreword to the Code states that a failure to follow the Code does not in itself make a party liable to proceedings or lead to an adjustment in any compensation award made by an employment tribunal. However, where a provision of the Code appears to a tribunal to be relevant to any question arising in the proceedings before it, the tribunal must take that part of the Code into account in determining that question.

The Code gives guidance as to what may amount to ‘improper behaviour’, which may potentially disapply the rule regarding pre-termination negotiations and comments on the interaction between the rule regarding pre-termination negotiations and the without prejudice rule.

The following is recommended as appropriate employment practice when holding pre-termination discussions under the Acas Code:


a. When proposing a suggestion, it could be beneficial to explain why you think it would work.

b. The proposed settlement agreement shall be given to the parties “sufficient time” to evaluate it:

c. The facts of the case will determine what a “reasonable amount of time” is.

d. Unless the parties agree differently, a minimum of 10 calendar days should be given to evaluate the formal written provisions of a proposed settlement agreement and to get independent counsel.

e. Any face-to-face discussions of ideas should take place at a predetermined time and location (i.e. the meeting should be agreed in advance, and the employee should not be taken by surprise)

f. While allowing employees to be accompanied at such a meeting by a coworker, trade union official, or trade union representative is not required by law, it is considered good practice and “may help to progress settlement discussions”.

g. If a proposed settlement agreement based on the termination of employment is approved, the employee’s employment may be terminated either with the contractually necessary notice period or as of the date indicated in the agreement.

h. The agreement should include information on any payments owed to the employee, including the timing of such payments.

i. Alternative forms of resolution should be pursued, whether through a performance management, disciplinary, or grievance procedure if a settlement agreement is rejected and the parties still seek to resolve the conflict or issue that gave rise to the offer.

3. Confidentiality, Without Prejudice and Protected Conversations


The starting point is that evidence of any negotiations to settle a dispute or agree to terms of the employee’s departure is admissible in any subsequent litigation. However, there are two possible ways in which the confidentiality of negotiations may be protected: either under the ‘without prejudice’ rule or as a protected conversation relating to pre-termination negotiations for ordinary unfair dismissal claims under section 111A of the Employment Rights Act 1996

a. ‘Without Prejudice’ Rule

Communications are not admissible as evidence and cannot be the subject of a disclosure order under the “without prejudice” rule.
The without prejudice rule is only available where there is an existing dispute between the employer and employee.

Communications between you and your employer, such as letters or conversations, may be headed or preceded as being ‘without prejudice’. The intention is to indicate that the item cannot be disclosed or admitted as part of any tribunal proceedings that may follow.

The without prejudice rule can potentially apply to all types of litigation while the rule regarding pre-termination negotiations can only apply to ordinary unfair dismissal claims.

b. Protected Conversations

A ‘protected conversation’ is slightly different in that it relates to discussions instigated by either the employer or employee to first raise the matter of a settlement agreement without a pre-existing dispute.

Again, the intention is to indicate that the discussion cannot be disclosed or admitted as part of any tribunal proceedings that may follow unless an exemption applies, for example, in discrimination cases.

The rule applies to discussions and offers from before employment termination, and there is no requirement for there to be an existing dispute for the rule on pre-termination negotiations to apply.

4. S111a Employment Rights Act & Settlement Agreements


Section 111A Employment Rights Act 1996 permits private discussions between an employer and an employee. This clause resembles the “Without Prejudice” concept in many aspects. Lawyers frequently use the phrase “Without Prejudice” to have “off the record” conversations, usually with the goal of coming to a resolution to a dispute.

It permits an employer to speak with a worker about ending their employment with a settlement agreement off the record and in confidence during an employment dispute without the conversation’s contents being revealed in any future legal procedures, such as a claim before an employment tribunal.

However, there must already be a disagreement for the “Without Prejudice” concept to be applicable.

This created a practical challenge for many employers who wanted to address potential issues with their workers, which prompted the creation of Section 111A of the Employment Rights Act of 1996, which permits such conversations to occur even in the absence of an active dispute.

Pre-termination conversations (including any settlement proposals) cannot be used as evidence in any judicial actions, according to Section 111A.

This regulation does have some exceptions, such as when anything is said or done that the tribunal deems to be “improper.” This would include actions that may be seen as bullying or harassment. Therefore, employers must be cautious while engaging in discussions.

It’s also crucial to remember that not all claims are covered by the provision. Claims of discrimination, automatic unfair termination, or illegal salary deductions, for example, are not included.

If a settlement agreement cannot be achieved, neither party may, with certain restrictions, subsequently refer to or rely on any negotiations that had occurred on a protected basis.

Therefore, the employee is prohibited from bringing up those talks to show that the outcome of the procedure was predetermined when such a discussion happens prior to a future disciplinary or dismissal process.
The purpose of the clause is to encourage out-of-court settlement agreements and to avoid the expenses, inconveniences, and tensions that come with formal judicial processes.

Employers are not required to notify their employees before starting protected conversations since they can do so even if there isn’t a current conflict.

If an employee feels they are receiving unfair criticism during a Section 111A dialogue, they are still free to file a grievance.
When an existing dispute arises at the time of the “off the record” conversation, Section 111A and the Without Prejudice principle will overlap somewhat since talks will be covered by both clauses.

Section F: Drafting a Settlement Agreement


A well-drafted settlement agreement protects the employer’s interests and, provides clarity and fairness to the employee, and ensures a clear, fair, and legally compliant resolution to employment disputes.


1. Preparation

The first step in drafting a robust settlement agreement is identifying the need for such an agreement based on the specific circumstances of the employment dispute. This involves determining whether a settlement agreement is the most appropriate solution. Once the necessity is established, gather all relevant information, including the employee’s employment history, the nature of the dispute, and any previous correspondence or documentation related to the issue. This comprehensive collection of details forms the foundation for drafting a tailored and effective agreement.


2. Initial Drafting

Begin the initial drafting process by using a standard template that complies with UK employment law. This template serves as a starting point, ensuring that the basic legal requirements are met. Modify the template to fit the specific situation, incorporating all essential clauses such as termination details, compensation, confidentiality, non-disparagement, future claims, and references. These key clauses ensure that the agreement covers all necessary aspects and provides clarity and protection for both parties.


3. Review and Customisation

Next, tailor the agreement to reflect the unique aspects of the case, ensuring fairness and compliance with legal requirements. This customisation ensures that the terms are relevant and appropriate for the specific situation. It is crucial to have the initial draft reviewed by a legal professional. This legal review ensures that the agreement meets all legal standards, addresses potential issues, and is enforceable.


4. Negotiation

After the initial draft is prepared, present it to the employee and their legal advisor for review and feedback. This consultation phase is critical for ensuring that the employee understands and agrees to the terms. Based on the feedback received, make necessary amendments to the agreement. The goal is to reach a mutual agreement on all terms, ensuring that both parties are satisfied with the final document.


5. Finalisation

Once the negotiation phase is complete, confirm that the employee has received independent legal advice. Include a confirmation clause in the agreement to document this requirement. Obtain signatures from both parties and the employee’s legal advisor to finalise the agreement. These signatures signify that all parties have agreed to the terms and are committed to upholding them.


6. Implementation

The final step is implementing the terms of the agreement. This includes making any agreed payments, providing references, and fulfilling any other obligations outlined in the document. Maintain a copy of the signed agreement and all related records for future reference. Proper execution and record-keeping ensure that the agreement is adhered to and can be referenced if any issues arise later.


Section G: Finalising the Settlement Agreement


Finalising the settlement agreement involves several key steps, from ensuring all terms are met to maintaining clear communication with the employee.


1. Signatures and Documentation

Finalising a settlement agreement begins with ensuring that all relevant parties sign the document. This includes obtaining signatures from the employee, the employer, and the employee’s legal adviser. Additionally, verify that all legal formalities are completed, such as the inclusion of the adviser’s certification of legal advice. This step confirms that the employee has received the necessary independent legal advice, thereby reinforcing the agreement’s validity.


2. Issuing Final Documents

Once the agreement is signed, provide the employee with a copy of the signed settlement agreement and any related documents, such as a reference letter or details about benefit continuation. Using a final checklist can help ensure that all elements of the agreement have been addressed and documented properly. This thorough documentation process helps prevent future misunderstandings and provides clear records for both parties.


3. Execution of Financial Terms

Execute the financial terms of the agreement by processing the agreed-upon settlement payment as specified. Ensure that payments are made promptly and accurately to avoid any delays or discrepancies. Additionally, include any outstanding wages, accrued holiday pay, and other benefits in the final paycheck as outlined in the agreement. This ensures that all financial obligations are met in accordance with the terms agreed upon.


4. Implementing Non-Financial Terms

For non-financial terms, arrange for the return of any company property, such as laptops, phones, and documents, as stipulated in the agreement. Ensure that any agreed-upon benefits, such as health insurance, continue for the specified period. Proper management of these non-financial aspects helps fulfil the agreement comprehensively and maintain a professional relationship with the departing employee.


5. Termination of Employment

Coordinate the logistics of the employee’s final working day to ensure a smooth transition. This includes arranging exit interviews, overseeing the handover of duties, and collecting company property. Conducting an exit interview allows you to gather feedback and address any final concerns the employee may have. Managing these logistics effectively ensures that all necessary tasks are completed and that the employee’s departure is handled professionally.


6. Compliance and Monitoring

Regularly monitor compliance with the terms of the settlement agreement, including clauses related to confidentiality and non-disparagement. This ongoing oversight helps in ensuring that both parties adhere to the agreed terms. Promptly address any issues or breaches of the agreement to prevent escalation. Effective compliance monitoring and issue resolution are essential for upholding the integrity of the settlement agreement and avoiding future disputes.


7. Employee Breaches

The agreement should state what happens in the event either party breaches any of the terms. Failure to meet the obligations under the agreement can give rise to a claim for breach of contract.

Generally, this will mean repaying some or all of the payments made by the employer, together with any legal fees incurred as a result of the breach.


Section H: Summary


Settlement agreements serve as invaluable tools for employers navigating employment disputes and terminations. They offer a structured approach to resolving conflicts while protecting both the employer’s and employee’s interests.

As you consider settlement agreements, remember to proactively address issues before they escalate, seeking to resolve conflicts amicably whenever possible. Engage legal advisers early in the process to ensure compliance with legal requirements and to navigate complexities effectively. Handle negotiations and terminations with empathy and respect, aiming to preserve positive relationships where feasible.


Section I: Need Assistance?


Our specialist employment lawyers are on hand to support you with any issues relating to settlement agreements, severance discussions and terminating employment contracts lawfully.

We can advise employers to ensure any settlement takes account of minimum legal entitlements under statute and under contract and ensuring these are included within the settlement calculation, as well as additional compensation elements, e.g. for loss of office and what would constitute a fair and reasonable amount.

This requires consideration of multiple factors. We will first look in general terms at the circumstances of the agreement and how much the employee could expect paid, and apply this to the specific facts of the case.

We have substantial experience in all types of employment claims across market sectors, job roles and seniority levels to provide guidance on compensation levels and help employers determine what would be reasonable in the circumstances.

Contact us for specialist advice.

Section J: FAQs


What is a settlement agreement?
A settlement agreement is a legally binding contract between an employer and an employee that outlines the terms for resolving a dispute or ending the employment relationship. It typically includes compensation for the employee in exchange for waiving their right to bring future claims against the employer.


When should an employer use a settlement agreement?
Settlement agreements are commonly used in situations such as redundancies, performance-related dismissals, workplace disputes, long-term sickness absence, and mutual terminations. They help to avoid the uncertainties and costs associated with employment tribunals.


How does a settlement agreement work?

A settlement agreement is used to bring employment to an end on specific terms agreed by the employer and employee, which typically include a promise by the employee not to pursue employment tribunal claims in return for a settlement amount.


What is a good settlement agreement?

The amount of settlement will depend on the specific individual circumstances, but as a general rule, settlements can be around 2-3 months’ of the employee’s salary.


What does a settlement agreement cover?

It should meet the conditions of being a legally binding agreement and should cover all types of potential employment claims.


Why do companies offer settlement agreements?
Settlement agreements are used by companies to terminate employment contracts on mutually accepted terms so as to prevent the risk of the employees making tribunal claims.


Section K: Glossary


Acas (Advisory, Conciliation and Arbitration Service): A UK-based organisation that provides free and impartial advice to employers and employees on workplace relations and employment law, including settlement agreements.

Confidentiality Clause: A provision in a settlement agreement that requires both parties to keep the terms and details of the agreement confidential.

Employment Tribunal: A judicial body in the UK that resolves disputes between employers and employees over employment rights. Settlement agreements can help avoid the need for tribunal proceedings.

Independent Legal Advice: Advice provided by a qualified lawyer or advisor to the employee about the terms and effects of a settlement agreement. This is a legal requirement in the UK for the agreement to be valid.

Non-Disparagement Clause: A clause in a settlement agreement that prevents both parties from making negative or damaging statements about each other.

Payment in Lieu of Notice (PILON): A payment made to an employee instead of giving them a notice period before their employment ends. This is often included in settlement agreements to provide immediate termination.

Redundancy: A situation where an employer reduces their workforce because a job or jobs are no longer needed. Settlement agreements are commonly used in redundancy situations to ensure a smooth transition.

Settlement Agreement: A legally binding contract between an employer and an employee that settles any claims the employee might have in exchange for compensation or other benefits.

Statutory Redundancy Pay: The amount of money an employee is entitled to by law if they are made redundant. This is calculated based on age, length of service, and weekly pay.

Termination Date: The date on which the employee’s employment officially ends. This is specified in the settlement agreement.

Waiver of Claims: A provision in a settlement agreement where the employee agrees not to pursue any future legal claims against the employer related to their employment or its termination.

Without Prejudice: A legal term used in negotiations to indicate that statements made cannot be used as evidence in court if the negotiations fail and legal proceedings ensue.

Ex Gratia Payment: A voluntary payment made by the employer to the employee that is not legally required but offered as part of the settlement agreement as goodwill compensation.

Notice Period: The period of time that an employee must work after resigning or being given notice before their employment officially ends. Settlement agreements often outline how this period is handled.

Legal Advisor: A qualified professional, such as a solicitor, who provides independent legal advice to the employee regarding the settlement agreement.

Governing Law: The legal framework that governs the settlement agreement, typically specified as the law of England and Wales for agreements made in the UK.

Section L: Additional Resources

Acas (Advisory, Conciliation and Arbitration Service)
Comprehensive information on settlement agreements, including templates and best practices.


Official UK government guidelines on employment contracts and settlement agreements.


Chartered Institute of Personnel and Development (CIPD)
Factsheets and guidance on settlement agreements and other HR practices.


Employment Lawyers Association (ELA)
Articles, guidelines, and resources related to employment law.




Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.

She is a recognised by Legal 500and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.

Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals

About DavidsonMorris

As employer solutions lawyers, DavidsonMorris offers a complete and cost-effective capability to meet employers’ needs across UK immigration and employment law, HR and global mobility.

Led by Anne Morris, one of the UK’s preeminent immigration lawyers, and with rankings in The Legal 500 and Chambers & Partners, we’re a multi-disciplinary team helping organisations to meet their people objectives, while reducing legal risk and nurturing workforce relations.

Legal Disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct at the time of writing, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

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