A settlement agreement is essentially a compromise between an employer and an employee to bring the latter’s period of employment to an end.  It is usually drawn up when there is a dispute between the parties, so the agreement will enable them to resolve certain matters and allow the employee to leave the place of work. It will also protect the employer from the former worker bringing any unfair dismissal claims in the future. The agreement will usually contain a confidentiality clause, which will be mutually beneficial to both parties.

These types of agreements and the confidentiality clauses they may contain should not be confused with gagging clauses which go further in trying to stop protected disclosure from being leaked.

There is no compulsion on the parties to enter into this type of agreement, but it is attractive to firms because it brings matters to a resolution, while at the same time protecting them from future claims. The attraction for the employee is that they will receive a lump sum payment as a form of compensation for bringing the matter to a close, in return ensuring they will not take any further action against their employer.

For the employee to be in a position to agree to a settlement agreement, they must have first received advice on the agreements terms and effects. They must have received this advice from an independent legal advisor who most not be also acting for the employer, or any associated employer.

There are other requirements which must be met to ensure that the settlement agreement is legally binding and enforceable. The agreement must be in writing, and it must relate directly to the particular grievance listed.

In terms of money, it is common practice for the employer to help out the employee by paying a share of their legal fees, though there are no set rules as to how much they have to contribute. This is at the discretion of the employer. The employer does not have to provide a reference for the aggrieved worker, though this is often included as part of the terms of the settlement agreement.

If the terms of the agreement are subsequently broken by either party, this becomes a breach of the contract, and therfore the other party maybe in a position to sue, if they can demonstrate they have suffered a loss. If the employee breaks the terms of the agreement, it may be that they will be required to pay back the money they were paid by their employer as part of the agreement.

The government is encouraging the use of settlement agreement as a way of resolving workplace disputes for a number of reasons. It welcomes the ending of disputes without using employment tribunals for the following reasons:

the employer will benefit from the assurance that they will not be taken to a tribunal by the employee

the employee benefits since they will receive severance pay and will not have a dismissal on their CV