A Guide to Settlement Agreements in Employment Law

Cases where employees drag their former employers to court due to dissatisfactions following the cessation of their appointment are increasing. Such employers often have to endure several months of court proceedings from which they stand to gain nothing.

Settlement agreements signed by both parties can help curtail such future misunderstandings. Such agreements involve agreeing on a compensatory sum of money the employee will receive upon termination of appointment with the employer.

Settlement Agreements in Employment Law

In most cases, creating such agreements usually involves a settlement agreement solicitor to simplify the process. Read the guide below to learn more about settlement agreements in employment law.

What is a settlement agreement?

A settlement agreement is a legal written contract between an employer and an employee. The agreement entails that the employee forfeits the right to drag the employer to court over any unfair employment decision. A settlement agreement can also be referred to as a compromise agreement.

This is usually in exchange for an agreed amount of money known as the ‘termination payment.’ Common reasons for such employment law claims could be a wrongful or unfair dismissal or discrimination against an employee.

Properties of a settlement agreement

  • A settlement agreement is legally binding on both the employer and the employee;
  • The agreement voids the employee’s rights to make any claims against the employer regarding any terms contained in the agreement;
  • An employee has to agree to any terms before they are added to the agreement;
  • The agreed termination payment contained in the compromise agreement can be negotiated by the employee.

Under what conditions can a settlement agreement stand?

  • The agreement must be written;
  • Such a settlement agreement must be relatable to a particular proceeding or complaint;
  • The employee must be aware of the implications of all the terms contained in the agreement. This will require the employee to seek advice from an agreement solicitor;
  • The written document must acknowledge the advisor or solicitor;
  • Compromise agreements must clearly indicate the satisfaction of applicable statutory conditions regulating the agreement by the employee.

A Guide to Settlement Agreements in Employment Law

What is contained in a settlement agreement?

The terms contained in settlement agreements differ with employers. Moreover, all the terms contained in the agreement can only hold upon negotiation and agreement by both parties. However, some general rules that are binding on any settlement agreement are stated below:

  • All applicable contractual shares, bonuses, and benefits;
  • Payments that are due to the employee as a result of any holidays or notices;
  • The value or amount you’ll receive upon termination of your working contract, also – also known as ex-gratia or compensation payments;
  • Waiver of any employment claims;
  • Non-derogatory and confidentiality comments;
  • A reference;
  • Legal costs;
  • Warranties from the employee indicating full compliance to their employment contract.
  • Practical issues such as the resignation of directorship, return of employer properties, handovers;
  • Refund of termination payment by the employee if they go ahead to make legal claims against the employer;
  • Indication of tax-free payments and those that are subject to national insurance deductions as well as income taxes.

Settlement agreements FAQs

What terms are not included in settlement agreements?

Specific terms that are not included in settlement agreements are personal accumulated pension rights and individual injury claims that are unknown to the employee.

What factors determine the termination amount?

The duration of the employment of the concerned employee and the reasons that led to the need for a settlement agreement is common determinant factors. Also, some employers consider the resources required to face a tribunal over claims made by the employee.

Do I have to pay taxes from a termination payment?

No taxes are required for termination payments equivalent to or less than £30,000. However, other payments such as holiday bonuses and wages are subject to tax deductions.


Neither employers nor employees like the stress of facing a tribunal for months. In addition, other expenses will still accrue. However, employment claims are not always a sure-win for any involved parties. Alternatively, one could avoid such extraneous proceedings by using a settlement agreement.

Employees unfamiliar with the proceedings must seek advice from a proficient settlement agreement solicitor. This will help them ensure that they don’t get cheated. Employers can also use this to keep their establishment’s name from being dragged in the mud.

Francis Nwokike

Francis Nwokike is the Founder and Chief Editor of The Total Entrepreneurs. A Social Entrepreneur and experienced Disaster Manager. He loves researching and discussing business trends and providing startups with valuable insights into running a profitable business. He created TTE to share ideas and tips to help entrepreneurs run and grow their businesses.

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