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How to make a Settlement agreement

A settlement agreement is a legally binding contract between an employer and employee which details an employee's claims against the employer. It also contains terms including when the employment will be terminated, how much compensation is offered, how the employee will serve their notice period and more.

Negotiate with an employee from the outset and protect yourself from any future claims using this settlement agreement (previously known as a compromise agreement). A settlement agreement is a legally binding contract that waives an employee's right to bring a claim, normally in exchange for payment.

Settlement agreements can be used in many circumstances including handling grievances, long term sickness, redundancy and performance management at work. Use this legally binding settlement agreement to prevent taking a dispute to the Employment Tribunal which could be costly and have uncertain results. Severance arrangements must be recorded in writing and the employee must receive independent legal advice for the agreement to be legally binding.

Use this settlement agreement template:

  • to settle claims that an employee has against their employer in connection with their dismissal
  • to agree on terms on which an employee will leave employment and waive any associated claims
  • to settle claims that had arisen before an employee left employment
  • only for employees based in England, Wales or Scotland

If you need specific advice and want our expert lawyers to review your settlement agreement, Rocket Lawyer offers bespoke settlement agreement legal advice.

This settlement agreement covers:

  • termination of employment
  • salary, benefits and expenses due up to termination
  • payments of compensation for claims, notice period, bonus due and holiday pay
  • taxation of termination payments
  • tax indemnity from the employee
  • repayment of sums owed to the employer
  • pension arrangements
  • employee reference
  • return of company property
  • confidentiality and post-termination restrictions
  • waiver and settlement of claims
  • requirement for independent legal advice

An employer may need to use this agreement to settle claims in connection with: a departing employee's dismissal; to settle claims that had arisen before they left employment, or to agree on terms on which an employee will leave employment and waive any associated claims.

If a departing employee signs a settlement agreement offered to them, and they are advised as required by ACAS, they cannot take out a claim with the Employment Tribunal against that employer, if the claim is related to the specified claims covered by the settlement agreement.

You need this agreement to prevent your employee from taking a claim to the Employment Tribunal, which can be costly and have uncertain results.

Yes, you can commence a settlement agreement after your employee started a claim against you at the Employment Tribunal.

Yes, you may want to agree with a departing employee the terms of this settlement agreement whilst they are still employed.

The compensation amount should be a sum of any outstanding payments to compensate your employee's waiver to bring any kind of claim against you such as:

  • failure to give due notice where the payment is not made in accordance with a PILON clause
  • a lost bonus where the payment is not contractually due
  • payment for accrued holiday (ie unused holiday)
  • enhanced or statutory redundancy payment where applicable
  • ex -gratia payment (ie incentive to sign a settlement agreement)
  • legal costs

You should give the employee between 14 and 21 days to sign and return the settlement agreement. This will allow enough time for them to obtain independent legal advice, as required by law to make the agreement valid. ACAS recommends ten days as a minimum amount of time.

It is common to agree on a form of reference for the departing employee. This helps to avoid future disputes and can be included with a settlement agreement.

Settlement agreements can be used to settle claims that have been started in the courts and those that have not. They should not, however, be used to settle claims that have not yet become known. The event (eg the action or discussion) that leads to the claim should have occurred before a settlement agreement is made for it to be covered. Attempts to settle all potential future claims (ie including unknown claims) are likely to be unenforceable.

For example, even if a settlement agreement specifically states that race discrimination claims are settled, a race discrimination claim based on discrimination that occurs after the agreement is created will not be settled under that agreement, and the employee may later pursue this claim.

This settlement agreement template takes this limitation into account. It does not attempt to settle future claims that are based on happenings that have not yet occurred. For more information, read Settlement agreements with employees.

Ask a lawyer

  • if you want to waive claims for an employee who will remain in employment
  • for employees who spend some or all of their time working outside England, Wales or Scotland

This settlement agreement is governed by the law of England and Wales or the law of Scotland. In order for this agreement to be valid, the employee must receive independent legal advice from a person who satisfies conditions set out by law. Most solicitors will meet the necessary criteria.

Other names for Settlement agreement

Compromise agreement, Employment settlement agreement.