A Settlement Agreement (formerly called a Compromise Agreement) is a legally binding agreement, usually between an employee and employer, setting out the financial and all other terms on which the employment relationship will end. This might be for reasons of redundancy, dismissal or by mutual consent. Usually, the Settlement Agreement provides for a severance payment by the employer, in return for which the employee agrees not to pursue any claim he or she may have to an employment tribunal.
Settlement Agreements are useful in circumstances where the employer wishes to avoid the costs or uncertain outcome of an employment tribunal. The three different Settlement Agreements are tailored to apply to employees at different levels of seniority within the company.
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Frequently Asked Questions
What makes a settlement agreement legally binding in England and Wales? +
A settlement agreement is binding only when it meets the statutory conditions in section 203 of the Employment Rights Act 1996. It must be in writing, relate to specific identified claims (not a blanket waiver) and confirm those conditions are satisfied. Crucially, the employee must receive independent legal advice on the terms and effect before signing, and the adviser must be named in the document and hold a current contract of insurance or professional indemnity cover. Without independent advice the agreement cannot prevent the employee bringing claims.
Which Simply-Docs settlement agreement template should I use for my employee? +
Choose by seniority, because the terms around post-termination restrictions, share options and board duties differ significantly: use the Standard Settlement Agreement for most employees, the Settlement Agreement for Management and Sales for those roles and the Directors Settlement Agreement for company directors. To document the process, the Letter to Invite an Employee to a Meeting to Discuss a Settlement Agreement and the Letter Enclosing a Settlement Agreement help before and after signing.
Can I approach an employee about a settlement agreement without it being used against me at tribunal? +
Yes, in most cases. Section 111A of the Employment Rights Act 1996 lets employers initiate settlement discussions even where no dispute exists, and these protected conversations cannot ordinarily be used as evidence in a later unfair dismissal claim. However, the protection does not cover discrimination, whistleblowing or other automatic unfair dismissal claims, and it is lost if there is improper behaviour. Where a dispute already exists, the older 'without prejudice' principle may apply more broadly. The Acas Code of Practice recommends giving the employee at least 10 calendar days to consider a formal written offer.
Does my employer have to pay for my legal advice on a settlement agreement? +
There is no legal obligation on an employer to pay for independent legal advice, but it is standard practice to do so. This matters because a settlement agreement cannot be binding unless the employee has received that advice before signing. Without it, the agreement does not prevent the employee from bringing claims. Employers routinely include a fixed contribution to legal costs in the agreement itself to ensure the condition is met. If no contribution is offered, the employee must still obtain independent advice and will need to fund it themselves.
When during a dismissal or redundancy process should an employer use a settlement agreement rather than following the formal procedure? +
A settlement agreement is not a substitute for fair process in most cases and should not be used simply to avoid managing performance or conduct properly, as this risks unfair dismissal or discrimination claims. It can be proposed at any stage: before a formal process starts, during it or after it concludes. It is most commonly used where there is genuine litigation risk, where a disciplinary or capability outcome is uncertain or where a clean break is commercially important. The Acas Code of Practice notes problems are best resolved through open conversation and appropriate formal procedures first.
