Definition
A legally binding contract between an employer and employee that settles potential or actual employment claims. The employee typically receives a financial payment in exchange for agreeing not to bring specified claims against the employer. Formerly known as a compromise agreement.
UK Context
Settlement agreements are governed by section 203 of the Employment Rights Act 1996 and equivalent provisions in other employment legislation. To be valid, the employee must receive independent legal advice from a qualified adviser, which the employer usually pays for. Pre-termination negotiations under section 111A are protected from disclosure in most unfair dismissal cases.
Best Practices
- Ensure the agreement clearly identifies the claims being settled and the terms of the financial package
- Allow the employee adequate time to consider the offer and take legal advice, typically at least 10 calendar days
- Follow the ACAS Code of Practice on Settlement Agreements for guidance on the process
Frequently Asked Questions
What is the difference between a settlement agreement and a compromise agreement?
They are the same thing. The term was changed from compromise agreement to settlement agreement in July 2013 under the Enterprise and Regulatory Reform Act 2013. The legal requirements and effect remain identical.
Does the employee need a solicitor?
Yes, for a settlement agreement to be legally valid, the employee must receive independent legal advice from a relevant independent adviser, typically a solicitor. The employer usually contributes towards the legal fees, commonly between 350 and 500 pounds plus VAT.