A settlement agreement is a legally binding contract between an employer and an employee that brings the employment relationship, and any related disputes, to an end. In return for agreed payments and other benefits, the employee waives the right to bring certain legal claims in the Employment Tribunal or civil courts. Settlement agreements are widely used across England, Wales and Scotland to resolve workplace issues quickly and privately.
In Great Britain, a settlement agreement must satisfy specific legal requirements. It must be in writing, relate to particular complaints or potential claims, state that the statutory conditions have been met, and confirm that the employee has taken advice from a relevant independent adviser. That adviser is usually a solicitor, but can also be a certified trade union official or certain advice centre workers. They must hold appropriate insurance and be identified by name in the agreement.
Settlement agreements are commonly used in redundancy situations, performance‑related exits, long‑term sickness cases, relationship breakdowns, and to settle existing Tribunal claims. They can be offered at any stage, from an early “protected conversation” through to the eve of a hearing. Importantly, they are voluntary. Neither side can be forced to sign and both parties should be given reasonable time to consider the terms and take advice.
The agreement will usually set out: the termination date; payments due (salary, notice, holiday, bonuses, redundancy and ex‑gratia compensation); the tax treatment of those sums; return of company property; confidentiality obligations; post‑termination restrictions; agreed references; and what happens if either party breaches the agreement. Once signed, it normally provides a “full and final settlement” of the claims listed, so it is vital that the drafting is accurate.
Settlement agreements are distinct from Acas COT3 agreements, which are used to settle disputes with the assistance of Acas. Both can achieve a clean break, but they arise in different procedural contexts and follow different formalities. Because the consequences are significant, employees and employers across Great Britain should obtain specialist legal advice before entering into any settlement agreement.
