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Employment settlement agreements

Settlement Agreements are written agreements entered into by employers and employees at the end of an employment relationship. Until recently they were known as compromise agreements. They are governed by employment legislation, which has established certain safeguards that must be met for these agreements to be binding.


As well as contractual rights relating to pay, holiday pay, redundancy and others employees do have rights such as the right not to be unfairly dismissed and the right not to be discriminated against on certain protected grounds. In a settlement agreement these rights are often being surrendered, and the agreement must refer to the particular rights being surrendered. However, the employee must first take independent legal advice. A settlement agreement is not binding unless the employee has taken independent legal advice and the advisor must have a relevant insurance policy.


Settlement agreements do not have to include a financial payment but almost invariably do. This is the most important aspect and we can advise as to whether the amount of compensation to be paid is appropriate in return for the employee surrendering his or her legal rights. In deciding whether to accept the amount of compensation being offered you will need to understand how an Employment Tribunal or a court would go about calculating the amount to be paid. In simple terms the amount of compensation focuses on actual financial losses. So if an individual is unfairly dismissed then part of the award is based on loss of earnings and other losses, including in some cases, pension losses. The dismissed person, if successful in the Employment Tribunal, would also receive a basic award calculated on the basis of their earnings, age and length of service with the employer. If an individual has been discriminated against then they may recover compensation for injury to feelings depending on the seriousness of the discrimination.

In considering any settlement agreement we can assess the sum being offered to you and can, if necessary, negotiate for a greater award.

Binding Agreements

There are other important matters to consider. A settlement agreement is intended to be a full and final settlement and so there will be a comprehensive waiver of all claims. However, there are important exceptions that must be borne in mind in particular in relation to accrued pension rights with the employer and any latent personal injuries that are not known to the employee at the time of the settlement agreement. There may also be questions as to company shareholding.

Confidentiality & Restrictive Covenants

There can also often be questions relating to confidentiality clauses and restrictive covenants. Restrictive covenants commonly seek to prevent an employer working for a competitor or soliciting or dealing with the former clients of the employer. If an employer has breached the contract that can raise questions about whether such restrictive covenant clauses remain valid.


Settlement agreements commonly include a reference, which can be of particular importance to the employee. It is rare for these references to include much more than very basic facts relating to the employment such as job title, start and termination date. In some instances a more detailed reference can be agreed.

Here at Mills Chody we have several years of experience of advising employees as to the terms and effect of these agreements and in drafting these agreements for employers.

This article is for information purposes only and is not legal advice. It should not be acted or relied upon and legal advice should be sought before applying any of the information in this article to any facts or circumstances.

For more information, or to discuss any issues arising from this article, please do not hesitate to contact us on +44 (0)20 8909 0400 or by email at

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