Settlement Agreements

Whether you are an employer or an employee, Macleod & MacCallum can offer advice on Settlement Agreements (formerly known as Compromise Agreements).

What are they?
• Legally binding
• A waiver of rights to bring certain claims in an employment tribunal or court
• Voluntary
• Confidential, (even negotiations) if properly drafted and no improper behaviour

A Settlement Agreement is a form of contract which can be used to end disputes between parties or bring a contract of to an end, subject to certain conditions. For employers, it is often used to end a workplace dispute with an agreed conclusion or to end the employment.

There are certain circumstances in which a Settlement Agreement will not relieve the employer of all claims against them. For example, even if an employee has signed a Settlement Agreement, they can never be prevented from “blowing the whistle” on an employer and a Settlement Agreement in place stating otherwise would be unenforceable in this respect.

When do you need one?

Downsizing: Offering a Settlement Agreement to certain employees, with over two years’ service, can save employers and employees from going through a redundancy process.

Dispute: If there has been a dispute that cannot be resolved, it may be that the employer wishes to terminate the contract. A Settlement Agreement would require the employee to waive their claims against the employer in relation to the dispute (e.g. for any claims of discrimination on grounds of sex).

Of course, a Settlement Agreement is entirely voluntary and so there is no obligation for the employee to accept.

Legal advice

There must be express provision for the employee to have advice on the Settlement Agreement. Often, the employer will contribute to the cost of the advice. An adviser’s certificate must be signed by an independent adviser who has given advice on the terms and effect of the Settlement Agreement and on its effect to pursue any claims. Without this, the Settlement Agreement will not be effective. Only certain people can be legally deemed to be an independent adviser in this situation. Generally, solicitors provide this service.

What might be included?

Depending on the situation, a Settlement Agreement may include anything from termination payments, compensation, or even an agreed reference.

A Settlement Agreement may include a termination payment. It may be the case that this will be entitled to be tax-free for up to £30,000 if it is considered compensation for loss of employment. Payment in lieu of notice should not be included in this figure. We can advise if this might be applicable to you.

Breach of terms

A breach of the Settlement Agreement by an employee will generally result in the employee re-paying any payments received. There may be additional penalties.

A breach of the Settlement Agreement by the employer will generally entitle the employee to claim damages or, in some circumstances, to treat the Settlement Agreement as unenforceable against the employee.

There are various other options available to parties in the event of a breach and advice should always be sought.

If you would like to know more about Settlement Agreements, from an employer or employee perspective, please contact

See also, Macleod & MacCallum articles on Settlement Agreements for more information:
• “A special one?” Playing it safe as an employer in Settlement Agreements
• “Approaching an employee about termination – are negotiations protected?”