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What is a settlement agreement and is it all about the money? In this current climate, I am dealing with a lot of settlement agreements and I am often asked, what is a settlement agreement and do I need one?

This article is a brief look at what settlement agreements are, what they are used for and how they are legally binding. There is also a link to the ACAS Code of Practice On Settlement Agreements at the bottom of the article.

What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and employee. It provides for a termination payment in exchange for an employee or worker waiving their rights to bring claims against the employer. It is not binding until employees have received independent legal advice and a solicitor signs a certificate confirming that advice has been received.

Employees often assume that they have to accept the initial offer that has been put on the table.  That is not always the case and it may be possible to negotiate both the termination payment and the terms of the agreement. 

But is it all about the money? 

For some employees, there may be other more important considerations to take into account such as: a good reference from the employer or, release from non-compete clauses which would enable an employee to work with competitors or customers.  This is particularly important for employees that work in a niche industry and the only other roles available are with competitors or, with customers of that employer.  It is also worth remembering that an employment contract may also contain post-employment restrictions which may also need to be negotiated on exit.

When negotiating a settlement agreement, parties should specify that all communications are on a “without prejudice” basis and subject to contract which means that neither party is legally bound by anything agreed in the negotiations until the settlement agreement is signed and it is only at that point that the agreement is legally binding.

Who pays the fees?

Employers generally contribute towards the legal fees and the employee must have received legal advice from a relevant independent adviser on the terms and effect of the agreement and its effect on the employee’s ability to pursue the statutory rights in question at the employment tribunal.


ACAS has a Code of Practice on Settlement Agreements, which can be viewed HERE.

Written by:

Rita Kochar, an employment solicitor at Taylor Rose TTKW. Connect with her on LinkedIn.