What is a Settlement Agreement? Everything You Need to Know

A settlement agreement is a legally binding contract between an employer and an employee (typically one who is leaving the company). It provides financial compensation in exchange for the employee waiving their right to bring legal claims against the employer.

Employers commonly use settlement agreements in various scenarios, such as ending employment due to disputes, offering enhanced redundancy packages, or as an alternative to disciplinary or redundancy procedures.

Although employers often initiate settlement agreement discussions, employees can also propose them.

If you’re contemplating this route, especially following a dispute or grievance, remember that such conversations should be conducted on a “without prejudice” basis, meaning they cannot be used in legal proceedings if negotiations fail.

Parties should seek legal advice before initiating such a discussion.

Before initiating settlement discussions, take these steps to prepare:

1. Understand your rights: Obtain advice regarding your legal position, the strength of your case and whether your circumstances justify an exit package.
2. Define your goals: Know how much you’re willing to accept and what you ideally hope to secure. Consider both financial and non-financial aspects, such as:
   • Reputational protection through an agreed
   • Outplacement
   • Retention of company property or continuation of
3. Assess practical factors: Employers may be influenced by commercial considerations, such as avoiding disputes or expensive and lengthy litigation or saving on salary costs.
4. Gather evidence: Collect all relevant documents and evidence to support your case.

A well-drafted settlement agreement should cover:

• Arrangements in relation to the employment end date: The termination date of your employment (if applicable), confirmation of any garden leave provisions, how director resignations will be effected and whether there are any announcements (including stock exchange announcements) to be made.
• Payments and Benefits: Any entitlements to notice pay, accrued holiday, bonuses, pension contributions, payments for shares and continuation of insurance benefits.
• Compensation: Clear details on the compensation amount and timing, including any tax-free allowances.
• Future claims: A list of claims you’re waiving and those you retain the right to
• Confidentiality: Provisions to ensure the terms of the agreement and other confidential information remain private.
• Return of property: There should be clear timelines for returning company property and clarification on whether any property may be retained.
• Restrictive Covenants: Reaffirmation or negotiation of non-compete or non-solicitation

Employers often contribute to legal fees, as the agreement is not legally binding unless you’ve received independent legal advice on the rights you are waiving before signing. You should ensure this contribution from your employer is outlined in the agreement.

We are experienced in advising employees, shareholders and senior executives on how best to plan for and negotiate mutually agreed exits, as well as advising on the terms of settlement agreements.

We always look to secure the best possible financial package whilst also incorporating reputational protection.

We also assist business owners in negotiating exit packages and preparing the settlement agreement terms.