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What is a settlement agreement?

A settlement agreement is a legally binding document which can be used by both the employee and employer to resolve a dispute or end employment. They are generally used so the employee and employer can part company on agreed terms. Settlement agreements are a way of avoiding costly and long legal battles and can offer an employee financial compensation as well as other benefits.

Contact our settlement agreement solicitors for legal advice, call us on 0161 696 6170.

Settlement agreements are covered in the Employment Rights Act 1996, under section 111A, and can request that you keep the terms of the agreement confidential. However, for a settlement agreement to be legally binding, you must receive independent legal advice from a qualified solicitor or union representative; without this, the agreement will not be legally binding. Paying for this legal advice is typically met by the employer. They are not legally required to do this, but often will, because it’s in their best interests to ensure you have the required legal advice to make the agreement binding If you wish to negotiate the terms and conditions of your settlement agreement with the help of a solicitor, then you may have to meet this cost yourself. 


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What makes a settlement agreement legally binding?

When entering into a settlement agreement, there is a process that must be followed for it to be legally binding. If the settlement agreement does not meet one or more of the below criteria, then it may not be valid, which leaves both the employer and the employee vulnerable.

For a settlement agreement to be legally binding, it must meet the following criteria:

  • It must be in writing
  • It must relate to a particular proceeding(s) or complaint(s)
  • It must be signed by the employee
  • The employee must have received independent legal advice, either from a qualified solicitor or an authorised union representative
  • The legal adviser must be identified and insured
  • The agreement must state that the requirements regulating the settlement agreement have been satisfied
  • A reasonable time limit should be given for both parties to consider the settlement. The ACAS code of practice on settlement agreements states there should be at least 10 calendar days given to review and consider the proposal.

Also, both parties are not obliged to enter into an agreement if they do not wish to. However, once a settlement agreement has been signed, the employee, usually, waives their right to bring a future claim against the employer.

ACAS code of practice on settlement agreements

The guidelines for settlement agreements are laid out in the ACAS code of practice on settlement agreements. ACAS are an independent public body that provide free and impartial advice to employers, employees and their representatives on employment rights, policies and disputes.

The ACAS code of practice on settlement agreements focuses on guidance for confidentiality and negotiations as well as general guidelines on how this should be conducted.

  • Under section 111A of the Employment Rights Act 1996 the agreed terms and conditions in the settlement can be kept confidential
  • Under section 111A, any negotiations can be kept confidential and, if the settlement agreement is dealing with a dispute, the ‘without prejudice’ principle may be used. This means that any offers or anything said (within reason) cannot be used at a later date. (e.g. in a tribunal)
  • Any claims that relate to discrimination, harassment, victimisation, whistleblowing, union membership, asserting a statutory right, breach of contract, wrongful dismissal or any behaviours prohibited in the Equalities Act 2010 are not covered by the confidentiality provisions of section 111A
  • If either the employer or the employee are subject to any improper behaviour then the confidentiality provisions set out in section 111A may not apply. Ultimately, what constitutes improper behaviour is for a tribunal to decide, but examples may include:
    • Any form of harassment, bullying or victimisation
    • Discrimination based on protected characteristics
    • Physical assault or any other criminal behaviour
    • Putting undue pressure on a party, which can include not giving enough time to consider the agreement and threatening dismissal (when no disciplinary process has begun) if you do not sign the agreement

For a more in depth look into the ACAS code of practice on settlement agreements, go to acas.org.uk.

If you need legal advice and guidance on a settlement agreement, contact one of our expert employment solicitors today on 0161 696 6170.

Frequently asked questions

Why do employers use settlement agreements?

Employers use settlement agreements to resolve workplace disputes with employees, such as claims of wrongful dismissal, unfair dismissal, discrimination, or harassment. They can be a cost-effective way to avoid lengthy and costly legal proceedings and to ensure that any potential claims are settled quickly and confidentially. Settlement agreements also provide a degree of certainty and finality for both the employer and the employee.

Why do you need a solicitor for a settlement agreement?

Before negotiating a settlement agreement, it is important to seek legal advice from a specialist solicitor who can review the agreement and provide guidance on your legal rights and entitlements. An experienced solicitor can advise you on whether the proposed settlement is reasonable and fair, and can help you negotiate better terms where appropriate. They can also ensure that your interests and legal rights are protected throughout the negotiation process. By seeking legal advice before negotiating a settlement agreement, you can have confidence that you are getting the best possible outcome and that your legal position is secure.

What makes a settlement agreement legally binding?

A settlement agreement is legally binding when both the employer and employee have agreed to its terms and have signed the document. It is a written contract that sets out the agreed terms of settlement, including any financial compensation or other benefits. Once signed, the settlement agreement becomes a legally binding contract, and both parties are required to comply with its terms. The agreement can only be challenged in court if it can be shown that it was not entered into voluntarily, or if one of the parties breaches its terms.

How to negotiate a settlement agreement

Negotiating a settlement agreement involves careful consideration of the terms of the agreement and clear communication with the other party. It is advisable to seek the guidance of a specialist solicitor who can provide expert advice on the terms of the agreement and help you negotiate better terms where appropriate.

To negotiate successfully, you should be clear on your desired outcome, prepare a detailed breakdown of your claims, and be prepared to make concessions where necessary. Maintaining a professional and constructive dialogue with the other party can help to ensure a successful negotiation and a mutually agreeable settlement.

Why would a company offer a settlement agreement?

Companies may offer a settlement agreement to an employee as a way to avoid the time and expense of legal proceedings. It can be a cost-effective way to resolve disputes or claims made by an employee, such as allegations of wrongful dismissal, unfair dismissal, discrimination or harassment. The agreement may also include confidentiality clauses, which can protect the reputation of the company and avoid negative publicity. Additionally, it can provide certainty and finality for both parties, allowing them to move on from the dispute and focus on their respective futures.

Are settlement agreements a good idea?

Settlement agreements can be a good idea for both employers and employees, as they provide a way to resolve disputes quickly and cost-effectively. However, seeking legal advice before signing is essential to ensure that the terms of the agreement are fair and reasonable.

What should be included in a settlement agreement?

A settlement agreement should include the terms of the financial settlement or compensation payment, any agreed reference or announcement, and any other relevant terms, such as confidentiality and restrictive covenants. It should also specify that the employee agrees not to pursue any legal claims against the employer, and that the agreement is subject to the employee receiving independent legal advice.

Is a settlement agreement a dismissal?

A settlement agreement is not a dismissal in itself, but it often arises in the context of the termination of an employee's employment. It is a legal document that sets out the terms of a financial settlement or compensation payment that an employer will pay to an employee, in exchange for the employee agreeing not to pursue any legal claims against the employer.

  • What are settlement agreements?

    Martha McKinley explains what a settlement agreement is, the importance of expert legal advice - whether an employee who has been offered a settlement agreement or from the perspective of an employer.

    Martha also provides guidance on the sort of thing a settlement agreement will include along with information on the cost of legal advice and the timescales involved.


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