The A to Z Guide on What is a Settlement Agreement and When to Use One

In the world of work, disputes and conflicts between employers and employees inevitably arise, and the severity of these disputes can differ, as can the way in which they are dealt with. 

A popular choice to settle disputes without having to go to employment tribunal is a settlement agreement, which can be a mutually beneficial resolution for both parties. 

If you’re currently in a dispute at work and you’re not sure what your options are, or you've been offered a settlement agreement by your employer and you’d like to know more about it, keep on reading to find out vital information regarding settlement agreements.  

What is a settlement agreement? 

A settlement agreement is a legally binding contract document between an employer and employee, which outlines an agreement to settle any potential claims, usually in return for a compensation payment which is paid by the employer to the employee.  

What should be included in a settlement agreement? 

Since settlement agreements are based on unique circumstances and specific negotiations between an employer and an individual, what is involved exactly can vary between cases. 

However, there are legal requirements as to what should be included in a settlement agreement to ensure that it is a valid agreement, which are: 

• The settlement agreement must be in writing 

• The settlement agreement must directly relate to particular proceedings or a complaint 

• The employee must receive legal advice from an independent advisor, such as a specialist settlement agreement or employment law solicitor 

• The independent advisor in question must have a current contract of insurance 

• The employee's advisor must be clearly identified in the settlement agreement 

• The agreement must clearly state that the terms relating to the settlement have been satisfied before singing and completing 

From here, negotiations can determine the specifics of a settlement agreement, such as compensation amounts, references, and benefits.  

When do employers offer settlement agreements? 

An employer would offer a settlement agreement in place of an employee taking them to employment tribunal over a claim or dispute. 

This is so both parties can avoid the time and cost implications commonly associated with employment tribunals and instead, reach a mutually beneficial agreement far quicker and easier.  

A settlement agreement can be used to settle common types of workplace disputes and statutory claims, such as unfair dismissal, wrongful dismissal or discrimination.  

However, there are certain claims that cannot be settled with a settlement agreement.  

What is the typical settlement agreement amount? 

There are varying factors that can impact the settlement agreement amount an employee receives, such as:  

• Whether you have been working at the company for more than two years 

• Whether your employer has forced you to resign 

• How much evidence there is to claim for constructive or unfair dismissal  

In these situations, the average settlement agreement amount is usually around one to four month's salary. This can also include any other payments you are owed, such as notice pay. Try our settlement agreement calculator to find out how much you could get.

Should you have evidence to support discrimination or whistleblowing claims, however, you may be entitled to more than this amount. Additionally, in such situations, the two-year service requirement would no longer be relevant.  

Are settlement agreements confidential? 

Typically, settlement agreements will include a confidentiality clause, which requires the employee in question to keep both the existence and the terms of the agreement confidential. 

For employers in particular this confidentiality clause is considered as vital, so as to prevent the settlement becoming common knowledge, such as to other employees within the business. 

What happens when a settlement agreement is breached? 

The legal consequences of a settlement agreement breach can vary depending on the circumstances. 

Common breaches include failure of payment from the employer or confidentiality breaches from either party.  

If breached by the employer, the employee may be eligible to bring a breach of contract claim against the employer. Typically, the aim of this claim would be compensation for any losses they have incurred as a result of the employer's violation of the agreement. 

If breached by the employee, the employer may be able to recover any money paid out to the employer. 

Find out more about settlement agreements from a settlement agreement solicitor 

Navigating and negotiating settlement agreements can be a complex process, with many areas to confirm before coming to a final agreement. 

A dedicated employment law solicitor can work closely with you to ensure a suitable agreement is achieved, such as compensation amounts, references and other benefits. 

To get in touch with someone from our team to discuss your settlement agreement, please email sa@smithpartnership.co.uk, or call us on 08000 32 32 02.