Settlement agreements have become an increasingly prevalent way for an employer and an employee to end the employment relationship, writes Employment Law solicitor Ioana Jelea.

Their popularity is unsurprising – settlement agreements can provide clarity and flexibility to suit both the employer and employee’s specific needs and circumstances.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract between an employer and an employee, and the terms and conditions must be agreed upon by both parties. Settlement agreements are normally entered into to bring the employment relationship to an end and can also be used when a dispute arises during employment, such as a claim for unlawful deductions from wages or discrimination.

By entering into a settlement agreement, an employee is giving up their rights to bring certain claims in the Employment Tribunal and courts against their employer, usually in exchange for some sort of financial compensation and/or other benefits.

Key Elements of a Settlement Agreement

Besides outlining that certain claims are settled and how much an employee is receiving as compensation, settlement agreements also typically include clauses which deal with the termination date, confidentiality, return of employer’s property, post termination obligations and references.

An employer will usually mention that the settlement agreement is offered ‘without prejudice and subject to contract’.

‘Without prejudice’ means that any discussions and statements made as a genuine attempt to resolve a dispute cannot be put before the Employment Tribunal and courts. This ensures that both parties can speak freely with the goal of reaching a mutually acceptable outcome.

‘Subject to contract’ means that the agreement cannot be relied upon by either party until it has been validly signed.

Independent Legal Advice

It is a statutory requirement for an employee to be advised on the terms and effect of the settlement agreement, otherwise the settlement agreement would not be valid. This is so that employers do not just make their employees sign away all their legal rights without first being advised by an independent legal adviser, such as a solicitor.


Although settlement agreements are voluntary and therefore there is no obligation on either an employer or an employee to enter into them, there are several advantages for both parties.

Settlement agreements provide a clear and more amicable end to the employment relationship by avoiding the need to litigate. Whilst most settlement agreements can be concluded within a couple of weeks, Employment Tribunal or court proceedings are much more time consuming – they can take between 12 and 24 months to reach a conclusion.

Employment Tribunal or court claims are very expensive, for both employers and employees. A settlement agreement would cost an employer much less than defending the claim of an employee. Usually, employers offer a contribution to employees’ legal fees for getting advice on the settlement agreement, making it a much less costly option for employees.

Not to mention that Employment Tribunal or court proceedings are very stressful and can take an emotional toll on the person and their family, therefore affecting both employees and employers.

Settlement agreements can also provide both parties with a degree of confidentiality which would not happen with Employment Tribunal or court proceedings. They can contain clauses that protect both employees and employers from public disclosure of the circumstances surrounding the termination of employment, any disputes and terms of the agreement.

A settlement agreement can be a good way for an employee to obtain an enhanced compensation payment, which could be a much-needed buffer until their next role and offer some peace of mind.

For employers, settlement agreements can be attractive as they can include non-disparagement clauses, meaning that an employee cannot make or publish derogatory or defamatory comments about the employer. This gives the reputation of the organisation a degree of protection and avoids any potential bad press.

A sense of control and closure

Unlike Employment Tribunal or court proceedings, settlement agreements offer some control over the outcome surrounding the termination of the employment relationship, as both employers and employees have to agree on the terms of the agreement before signing.  

A settlement agreement can represent a valuable tool in bringing a sense of closure to a difficult chapter in one’s life, allowing both parties to move on.

If you are seeking independent legal advice in regard to a settlement agreement or are looking for ongoing legal support as an employer, please contact our Employment Law solicitor Ioana Jelea by visiting