A Settlement Agreement (formerly known as a “Compromise Agreement”) is an agreement between two parties (ordinarily an employer and an employee) which serves to compromise one of the parties’ (usually the employee’s) potential contractual and statutory claims in relation to a particular complaint or upon termination of employment. In return, the employee will usually receive compensation for waiving their right to bring a claim or claims against their employer.


A Settlement Agreement is entirely voluntary and only becomes binding once both parties have signed it. There is no obligation for either party to sign the agreement and there may well be a process of discussion and negotiation during which both sides make offers and counter offers. Either party may walk away from the negotiating table at any point before execution. If agreement is not reached, the negotiations may not be admissible as evidence in claims before an employment tribunal or in other court proceedings.

Key features of a Settlement Agreement:

  1. The agreement must be in writing;
  2. The agreement must relate to a particular complaint or proceedings;
  3. Employee must receive advice from an independent legal advisor prior to signing the agreement. The advisor cannot be the employer, be employed by the employer, or have acted for the employer.
  4. The independent legal advisor must, at the time of giving advice, have appropriate insurance in place covering the risk of any loss to the employee from the advice provided;
  5. The independent advisor must be identified within the agreement; and
  6. The agreement must state that the statutory provisions which set out the above conditions regulating the validity of the settlement agreement have been satisfied.

Independent Legal Advice

Given that it is a requirement that an employee seeks independent legal advice in respect of a Settlement Agreement, the employer ordinarily contributes towards the costs incurred by the employee in doing so, that is to say an employer will generally pay some, or all, of the employee’s legal costs. There is no minimum contribution that an employer must make, nor is an employer obliged to cover the entire cost should there be significant complications and/or amendments required.


It is common practice for the agreement to contain an “Adviser’s Certificate” to be signed by the employee’s advisor once the employee is happy with the agreement and ready to sign themselves.


What happens once the Settlement Agreement has been signed by both parties?

Once the agreement has been fully executed (i.e. all parties have signed it), both parties shall be bound by the terms of the settlement agreement and the employee will receive the sums due to him by virtue of the agreement. Should any issues arise – such as non-payment– then the affected party can bring a claim for breach of contract against the other party to the agreement.


We can help!

Whether you are an employer looking to draft a Settlement Agreement or an employee who has been presented with one, Karen Bristow in our Employment department will be able to provide you with further information and advice.


The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.