Settlement agreements are a legal mechanism often used in the UK for the resolution of disputes, particularly in relation to employment matters.

A settlement agreement contract is a legally binding agreement between two parties, most often an employer and an employee, that resolves disputes or claims.

When the settlement agreement is signed, one party, which is usually the employee, agrees to forfeit their right to engage in a legal claim against the other party, which is normally the employer, in exchange for compensation or other agreed terms.

A Settlement Agreement is Regulated by Law

In the employment context, a settlement agreement is commonly used in a redundancy settlement, a workplace grievance, or a dispute concerning employment termination.

It is regulated by UK employment law and is required to meet statutory requirements if it is to be valid.

For example, an employee is required to get independent legal advice from a settlement agreement solicitor before signing takes place so that it ensures they understand the implications of the terms.

The Purpose of a Settlement Agreement

A settlement agreement ensures both sides agree to specific terms, providing clarity and finality while avoiding further legal action.

1. Providing clarity through a clearly written contract which outlines the rights and responsibilities of both of the parties, leaving no room for any ambiguity.
2. Maintaining confidentiality as many settlement agreements have clauses included which provide protection for the reputation of both parties by keeping confidential the details and terms of the dispute.
3. Facilitating smooth transitions for employees as a settlement agreement normally includes financial compensation and other benefits to help them move forward in life.
4. Avoiding litigation, so that parties settle disputes out of court, which saves time, money and emotional distress.

💡 For example, in the case of a redundancy, an employer may offer a redundancy settlement agreement that includes a higher than normal redundancy pay in exchange for the employee forfeiting their right to make a claim for an unfair dismissal.

Key Components of a Settlement Agreement

A settlement agreement is tailored to fit the dispute’s circumstances, but normally includes certain standardised elements.

Terms of settlement

The settlement terms outline the specific rights and obligations of both parties which normally include:

• The type of dispute that is in need of a resolution.
• Compensation or benefits the employee will receive.
• Any other agreed action, like the return of the company’s property or the provision of a job reference.

💡 For example, an agreement might state that the employer must pay, within 14 days, a lump sum, while the employee abandons any current complaints or claims that have been filed.

Confidentiality clauses

Confidentiality is the framework for many settlement agreements. This clause stops either party from publicly announcing the terms of the settlement agreement or the events that led up to the dispute.

• Employers use the confidentiality clause to protect any vulnerable business information.
• Employees also benefit by being able to keep details about their non-voluntary departure confidential.

💡 For example, an employee is not permitted to openly discuss the settlement terms with work colleagues or on a social media page, while the employer agrees not to make negative comments about the employee.

Waivers of claims

A central feature of the settlement agreement contract is the waiver of claims when the employee agrees not to pursue a specific legal claim, such as for:

• an unfair dismissal
• a case involving discrimination at work
• a breach of contract

So that these waivers are legally binding, the employee is required to get advice from a settlement agreement solicitor to help them understand which claims they are forfeiting.

Payment terms

The payment terms describe the financial compensation the employee should expect to receive. These could include:

• a lump sum payout
• payment for any accumulated but unused holiday leave
• bonuses or outstanding salary

In a few cases, payments are dealt with under a PAYE settlement agreement, where the employer calculates and subtracts taxes. Any redundancy payments that are £30,000 or more may be tax-free.

Non-disparagement provisions

A non-disparagement clause stops either party from making any derogatory or harmful statements about each other.

• The employee agrees not to speak negatively about the employer.
• The employer agrees to provide a neutral or positive reference that doesn’t tarnish the employee’s reputation.

This ensures that both parties are able to part ways amicably, without damaging anyone’s reputation.

Significance of a Settlement Agreement Contract

A settlement agreement is vital for the managing of disputes and avoiding engaging in a prolonged conflict. Their importance lies in:

• Avoidance of public disputes by adding a confidentiality clause, a settlement agreement protects both parties from any negative publicity;
• Saving costs and time as litigation can be both lengthy and costly while settlement agreements provide a faster and more cost-effective result;
• Offering finality once the agreement is signed so that it resolves the dispute once and for all and prevents any future claims on that same issue.

💡 For example, an employer who is facing a discrimination claim from an employee might choose to resolve the matter through a settlement agreement which involves compensating the employee.

Practical Applications of Settlement Agreements

Settlement agreements are flexible tools which are used in various situations, such as in resolving a workplace dispute or redundancy situations.

An employee who alleges being a victim of harassment might choose to agree to a settlement that includes suitable financial compensation, a reference, and a commitment coming from the employer stating it will implement a new workplace policy.

In a case of redundancy, an employer often uses a redundancy settlement agreement to provide an enhanced redundancy package in exchange for an employee waiving a potential claim against the employer.

Getting a Job After a Settlement Agreement

Employees often concern themselves about future career prospects once a settlement agreement contract has been signed.

However, a few agreements include terms that demand the employer provides a positive reference, which ensures the employee's transition to a new role is not disadvantaged.

ACAS Settlement Agreements

The Advisory, Conciliation, and Arbitration Service (ACAS) often assists with an ACAS settlement agreement,​ also referred to as a COT3 agreement, to resolve disputes without the need for any formal legal proceeding.

ACAS ensures that both parties understand their rights and obligations under the agreement, offering a cost-effective and confidential way to reach a resolution.

Using a Settlement Agreement Calculator

A lot of employees and employers use a settlement agreement calculator that estimates a fair compensation. Factors that are considered include:

• Statutory redundancy entitlements
• Gross yearly salary
• Employment length
• Compensation for a potential claim, such as a case of workplace discrimination or unfair dismissal

The settlement agreement calculator assists the parties to negotiate terms that are considered to be fair based on the features of the case.

The Role of Settlement Agreement Solicitors

A settlement agreement solicitor is necessary for ensuring that a settlement agreement is both fair and legally binding. They offer the following:

• Clarity on waivers which explains what legal claims the employee is about to forfeit;
• Independent legal advice that is required by law for the solicitor settlement agreement to be enforced;
• Negotiation support by assisting employees to secure improved terms.

💡 For example, a solicitor may try to negotiate a larger settlement for an employee who has strong grounds for unfair dismissal.