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Settlement Agreements

What is a Settlement Agreement?

A Settlement Agreement is a legally binding contract between an employee and an employer under which the employee agrees to waive their right to make employment related claims against their employer.

What are Settlement Agreements used for?

Although Settlement Agreements are commonly used when ending the employment relationship, they can also be used where the employment is ongoing; for example, to settle a holiday pay dispute.

Who proposes a Settlement Agreement?

Normally but not always, it will be the employer that proposes a Settlement Agreement. It is important to note though that, as with any contract, both the employer and employee must agree to the terms of the Settlement Agreement. If an employer dismisses an employee for refusing to sign a Settlement Agreement, they may face an unfair and/or wrongful dismissal claim from their employee.

What makes a Settlement Agreement legally binding?

In order for a Settlement Agreement to be legally binding, the following conditions must be met:

  1. The agreement must be in writing;
  2. The agreement must relate to a particular complaint or proceedings;
  3. The employee must have received advice from a relevant independent adviser (i.e. a lawyer or certified and authorised member of a trade union) who holds appropriate professional indemnity insurance;
  4. The agreement must identify the adviser; and
  5. The agreement must state that the applicable statutory conditions regulating Settlement Agreements have been met.

Advice to an employee about signing a Settlement Agreement

The employee should be given a reasonable amount of time to consider the Settlement Agreement. The Acas Code of Practice on Settlement Agreements recommends a minimum of 10 days unless the parties agree otherwise.

Take appropriate legal/professional advice

Once the parties have agreed the timescale to return the Settlement Agreement, the employee should contact a lawyer or a certified and authorised member of a trade union to provide advice on the contents of the Settlement Agreement.

Who pays for the advice?

The Settlement Agreement will usually provide for the adviser’s costs to be paid by the employer up to a specified value. The employer’s contribution should cover the adviser’s costs, so that the employee should not need to pay for the advice.

However, if the employee requires advice on any potential claims they may have or help with negotiating the Settlement Agreement, it is unlikely that such advice will be covered by the employer’s contribution. An employee should be informed by their adviser if costs are likely to exceed the employer’s contribution.

Can an employee still make a claim against their employer after signing a Settlement Agreement?

Once a valid Settlement Agreement has been signed by both employer and employee, the employee will be unable to make any employment related claim against the employer which has been settled under the agreement. In practice, most Settlement Agreements are entered into on or following termination of the employer and usually exclude all employment related claims.

Our Employment Team advises both employers and employees on Settlement Agreements. For further advice please contact our Employment Team.

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