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Settlement Agreements

Settlement Agreements

A settlement agreement, formerly called a “compromise agreement”, is a legally binding contract between an employer and employee entered into after or just before the employment has been terminated. Both parties agree the terms of the settlement and once it is signed, the employee cannot bring legal action against the employer regarding employment rights. In return, the employer will usually make an ex gratia payment, this is a service that we offer in Nottingham, Leicester and Derby.

Who do Settlement Agreements Take Place Between?

They can take place between an employer and a current employee; a former employee; a worker; or a job applicant who believes that they were discriminated against during the interview process.

What is a Settlement Agreement?

A legally-binding agreement signed by two individuals (it cannot be signed by a group of people) that renounces an employee’s right to bring a claim covered by an initial agreement to a tribunal or court. The agreement is a series of terms and conditions that have been mutually agreed upon by both parties.

The effect of this agreement is that an employee cannot pursue their employment rights but in return they receive an ex gratia payment (an extra sum). The agreement is confidential and can only usually be disclosed to a partner, adviser or HMRC, provided particularly in the case of a partner, which should be clearly stated.

When will it be used?

They are often used to bring an end to the relationship between an employer and employee in a way that both parties are happy with. Alternatively, they can be used to resolve an ongoing dispute, for example, if a worker has a complaint about holiday pay.

Compromise agreements can arise for a number of reasons, including but not limited to, long term ill health absence, redundancy or disciplinary issues that might lead to a claim for unfair dismissal and/or discrimination.

Example of Where an Employer Might Use One:

Peter worked in HR for twelve years years but the department downsized so he agreed to move into the admin office. Despite the boss’ attempts to help him, Peter cannot settle into this department so the company offer him a compromise agreement. Peter leaves the company with a good reference and the employer knows that he will not bring a tribunal claim against them.

Example of Where an Employee Might Use One:

Katie and Tamsin are both very good at their jobs but do not get on well. This disrupts the other team members so Katie approaches the boss with the idea of a compromise agreement. The boss discusses the terms of the agreement with Katie. The company agree to provide Katie with a good reference, a financial payment, and that Katie will leave at a time that is appropriate for her employer.


  • Provides a quick end to an employment relationship that is not working
  • Reduces the expenses, time and stress of a tribunal claim
  • Can provide compensation and often a good reference to the employee
  • The arrangement is confidential


  • Cost of paying an agreed financial sum to the employee
  • If a settlement is not agreed then an ongoing relationship can become strained
  • The potential risk to the workforce relations if they are used excessively rather than addressing workplace issues appropriately

What Should Be Included in a Settlement Offer?

Not all agreements are the same; they are often determined by each employer depending on the individual circumstances of the case. They might include:

  • A proposed financial payment to the employee
  • Details of the reference that will be given to the employee; either comprehensive details that include aspects such as employee’s behaviour or just simply agreeing the dates of employment
  • Some employers might include post-termination restrictive covenants, provisions that regulate what an employee can do for a limited period time following the termination of employment, for example, poaching clients, customers, suppliers and staff

How Much Compensation Should be Provided?

The employee/former employee receives some form of financial payment and often a reference as part of the agreed terms. The employee is entitled to all contractual payments according to a contract of employment or as stated by law (whichever is applicable in the circumstances).

The original contract of employment should contain important details, for example, about remuneration, he notice period and annual leave which must be adhered to. There are several factors that influence the amount of compensation such as the length of employment, how difficult it will be to find a replacement employee, how long it could take for the employee to find another job, and the probable costs of a tribunal or court action if no agreement is reached.

So if you’re in Nottingham, Derby or Leicester area and you would like to find out more about settlement agreements and discuss whether it is something that you should consider, call us on 01159 985245.