A settlement agreement (previously known as a compromise agreement) is a legally binding contract, which records the terms on which an employer and employee agree to terminate the employment relationship by consent.

It is a neutral agreement under which an employer pays the employee a sum of money in exchange for their agreement not to pursue any claims arising out of their employment or its termination.

The agreement effectively settles any disputes or potential claims against the employer regarding the employment.

An employee’s perspective of settlement agreements

Whilst employees may feel they have no alternative but to accept the settlement agreement, this is not the case.

An employee does not have to accept an agreement and may prefer to await the outcome of their employer’s internal procedure.

If an employee rejects a settlement agreement and their employment is subsequently terminated, depending on the circumstances they may be entitled to pursue a claim against their employer.

However, in some cases, the employee may prefer to accept the agreement than to go through a disciplinary process with a risk of dismissal (which in cases of gross misconduct will be without notice or payment in lieu of notice).

Similarly, if an employee is being offered more than their statutory redundancy entitlement and notice pay under the settlement agreement, they may prefer to accept the money offered under the settlement agreement than to wait and see if they are made redundant.

Requirements of a settlement agreement

In order to be legally binding, a settlement agreement must satisfy various conditions, including a requirement that the employee receives independent legal advice on the terms and effect of the agreement.

The settlement agreement will be drafted by the employer’s solicitor and in most cases; it is a term of the settlement agreement that the employee’s legal fees will be paid for by the employer.

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