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Settlement agreements: business briefing
This business briefing sets out the key issues a business should consider before entering into a
settlement agreement with an employee.
What is a settlement agreement?
A settlement agreement (formerly known as a compromise agreement) is a legally binding agreement
between a business and an employee under which the employee agrees to settle their potential
claims and in return the employer will agree to pay financial compensation. Sometimes the agreement
will include other things of benefit to the employee, such as an agreed reference letter.
In what circumstances will a settlement agreement be appropriate?
An employee can make a claim against a business under both their contract of employment
and under statute. These claims may arise:
o on recruitment;
o during employment; or
o when their employment has been terminated.
In many cases, a business may want to make a payment to an employee in return for an
effective waiver of their potential claims. Businesses can enter into an agreement with an
employee to settle potential claims when they are still working for the business, but in most
situations, their employment will have ended (or be about to end).
What are the legal requirements for a valid settlement agreement?
For a settlement agreement to be legally binding, there are a number of conditions that must be met:
The agreement must be in writing.
The agreement must relate to a particular complaint or particular proceedings.
The employee must have received legal advice from a relevant independent adviser (for
example, a qualified lawyer or union official) on:
o the terms and effect of the proposed agreement; and
o its effect on their ability to pursue any rights before an employment tribunal.
The independent adviser must have a current contract of insurance (or professional indemnity
insurance) covering the risk of a claim against them by the employee for the advice.
The employee’s adviser must be identified.
The agreement must state that the conditions regulating settlement agreements have been
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