Settlement agreements are voluntary and once signed, legally binding and essentially a method for an employer and employee to part on mutually agreed terms. Under a settlement agreement, the employee waives certain rights with regards to bringing any form of unfair dismissal claim against them in return for generally a sum of money. They can be used as a way of terminating an employee’s employment, typically at the end of a negotiation about a workplace dispute, (whether for example its performance related, as a result of a disciplinary or grievance case, an irreversible breakdown in relationship or redundancy situation), or used to settle an ongoing claim out of court and can be instigated by either party (employee or employer).

If a settlement agreement is proposed, there is generally some form of issues to trigger this, for example under-performance, prolonged illness, tensions in the workplace which are unlikely to be able to be resolved.

A suggestion of a settlement agreement generally begins under a protected conversation to discuss the proposed terms of the settlement. For this purpose, a protected conversation basically means the discussion is ‘off the record’ and allows for a frank conversation between parties which in some circumstances is inadmissible and cannot be used or relied upon in any subsequent claim/employment tribunal. Care should be taken though as there are situations where the discussion is not protected under the S111A of the Employment Rights Act and this would then be admissible. We would always recommend seeking advice before entering any protected conversations.

Once the settlement terms have been negotiated, the employee must seek independent legal advice before signing the agreement.

So, what are the benefits of using a settlement agreement?

For the employer, the main benefit is of course that the employee is exited from the business without risk of any future employment tribunal claim against them; but also from certain clauses within covering confidentiality and post termination restrictions which the employee will be bound by for the agreement to remain valid. It is also much more efficient and painless than a lengthy, costly and public employment tribunal!

For the employee, they have the ability to negotiate the terms of the agreement (factoring in things like your contribution to the business, personal circumstances etc) which may not be possible in a tribunal situation as well as an agreed reference for future employers which may not be received otherwise. The compensation payment may be similar to that awarded in an employment tribunal if the employee was to win their case, and without the cost of time and money and the stress of going through a court case. Another benefit is the employer generally covers the employee’s legal fees of a settlement agreement as well.

Settlement agreements can be an effective way for both employers and employees to resolve an issue or dispute within the workplace without the stresses of an employment tribunal, however they do need to be proposed and handle correctly so you should seek professional advice.

Please do contact us if you need support surrounding a settlement agreement. We can help you strike the delicate balance between legal protection and minimising the impact a leaver may have on your team.

Ensuring a smooth exit for leavers will give you peace of mind that your ex-employee is happy with the process and your business is protected. If you would like to discuss this or any other HR issues, please get in touch.

Contact us at or call 0203 538 5311.