Back to Insights Back to Insights

As a small business owner or HR professional, you may encounter various employment-related issues that require resolution. One effective way to address such matters is through a Settlement Agreement. 

This article aims to provide you with comprehensive guidance on drafting a Settlement Agreement, from understanding its legal implications to negotiating and enforcing it. Let's delve into the details of what a Settlement Agreement entails and how it can be a valuable tool in resolving employment disputes.

What is a Settlement Agreement?

A Settlement Agreement, (sometimes known as a Compromise Agreement), is a contract between an employer and an employee. It’s often used to settle disputes or end the employment relationship in a mutually agreeable manner enabling both parties to make a clean break.

When both parties enter into a Settlement Agreement, they agree to resolve specific issues and, in return, waive their rights to pursue any related claims in court or before an employment tribunal.

Is a Settlement Agreement legally binding?

Yes, Settlement Agreements are legally binding, provided certain conditions are met. To be enforceable, the agreement must be in writing and must identify the specific claims being waived by the employee.

It must also state that the employee has received advice from a qualified independent advisor, usually a solicitor, regarding the terms and effects of the agreement. The advisor's name and signature must be included in the agreement and commonly you’ll find a solicitor certificate attached to be signed on letterhead

What should a Settlement Agreement contain?

A Settlement Agreement should be clear, concise and tailored to the specific circumstances of the employment dispute. It typically includes the following key elements:

  • Identifying information – the names and addresses of both the employer and the employee, along with their job titles or roles
  • Agreed terms – a detailed outline of the terms both parties have agreed to, including the amount of any financial settlement, the reason for the agreement and any agreed-upon post-termination restrictions or restrictive covenants
  • Notice period and garden leave – if applicable, the notice period the employer must give to terminate the employment and whether the employee will serve this period or be placed on garden leave
  • Confidentiality clause – a provision outlining the confidentiality of the Settlement Agreement and its terms, preventing either party from disclosing the details to third parties, except for legal or professional advisors
  • Payment Arrangements and tax-free payments – logistics and timings of the payment and specific details about any payments made as part of the settlement that can be paid tax-free, in accordance with HM Revenue & Customs regulations
  • Legal fees – whether the employer will cover the employee's legal fees for obtaining independent legal advice on the settlement agreement

How are Settlement Agreements calculated?

The calculation of a Settlement Agreement varies depending on the nature of the dispute and the circumstances surrounding it. Generally, it involves negotiations between the employer and employee, possibly with the assistance of their legal advisors.

The settlement amount may include:

  • Compensation for loss of employment this can be based on factors such as the length of service, salary, and any financial losses incurred due to the termination of employment
  • Notice pay and holiday pay if the employee is required to work during the notice period, they’re entitled to receive notice pay, including any accrued holiday pay
  • Other financial benefits additional benefits such as bonuses, commission, or pension contributions that the employee would have received if the employment had continued

Are Settlement Agreements confidential?

Yes, Settlement Agreements are typically confidential, meaning the details of the agreement and the circumstances surrounding it shouldn’t be disclosed to anyone outside of the employer, employee and their legal or professional advisors. However, this confidentiality doesn’t extend to information required by law to be disclosed, such as for tax purposes.

How to write a Settlement Agreement

Drafting a Settlement Agreement can be a complex process, and it’s advisable to seek legal assistance to ensure all legal requirements are met. We have a free Settlement Agreement template, which you can use to get started and contains the below details:

  • Header information
  • Termination date
  • Termination payment
  • Pension
  • Waiver
  • Return of property
  • Employee promise
  • Confidentiality and other restrictions
  • Legal advice and fees
  • Entire agreement
  • Governing law and jurisdiction
  • Subject to contract and without prejudice
  • Signing separate copies of the Agreement
  • Signing


Free Settlement Agreement template


1. Header information

The header section of a Settlement Agreement typically includes the title "Settlement Agreement" or "Compromise Agreement", along with the names and addresses of both the employer and the employee. It may also include the date when the agreement is executed. This information serves to identify the parties involved and set the context for the rest of the document.

2. Termination date

The termination date refers to the date on which the employment relationship will come to an end. It should be clearly specified in the Settlement Agreement, ensuring that both parties are aware of the exact date when the termination takes effect. This date is crucial for calculating any termination payment and notice period, if applicable.

3. Termination payment

The termination payment section outlines the financial compensation that the employee will receive upon termination of their employment. This can include any redundancy payment, outstanding salary, accrued holiday pay, notice pay and other financial benefits owed to the employee. The terms of the termination payment, including the amount and payment method, should be clearly defined in this section.

4. Pension

If the employee has a pension scheme in place with the employer, this section will address how the pension will be handled upon termination. It may include details about pension contributions, any employer's contributions owed and options for transferring or leaving the pension scheme.

5. Waiver

The waiver section is a critical part of the Settlement Agreement. By signing the agreement, the employee agrees to waive their rights to pursue any legal claims or actions against the employer arising from their employment or its termination. This waiver ensures that both parties agree not to bring any future claims against each other in court or before an Employment Tribunal.

6. Return of property

In this section, the employee agrees to return any company property, documents or confidential information in their possession upon termination of employment. This could include laptops, mobile phones, keys, access cards or any other items provided by the employer during the course of employment.

7. Employee promise

The employee promise section outlines the commitments made by the employee to the employer as part of the Settlement Agreement. It may include promises not to make negative statements about the employer, not to disclose confidential information and to cooperate with any necessary post-termination obligations.

8. Confidentiality and other restrictions

This section deals with confidentiality obligations beyond the return of property. It may include a confidentiality clause preventing the employee from disclosing any terms of the Settlement Agreement to third parties, except for legal or professional advisors. It may also address other restrictions, such as non-compete or non-solicitation clauses, if applicable.

9. Legal advice and fees

To ensure that the Settlement Agreement is legally binding, the employee must receive independent legal advice on the terms and implications of the agreement. This section confirms that the employee has had the opportunity to seek legal advice and it may address who’ll bear the legal costs associated with obtaining such advice.

10. Entire agreement

The entire agreement clause states that the Settlement Agreement constitutes the entire agreement between the parties concerning the subject matter mentioned in the document. This means that any prior negotiations, discussions, or understandings not included in the Settlement Agreement are deemed to be superseded by its terms.

11. Governing law and jurisdiction

This section specifies the governing law under which the Settlement Agreement is interpreted and enforced. It also determines the jurisdiction, i.e. the location or court where any legal disputes related to the agreement would be resolved.

12. Subject to contract and without prejudice

The subject to contract and without prejudice clause clarifies that any negotiations or discussions leading up to the Settlement Agreement are "without prejudice". This means that they can’t be used as evidence in court or before an Employment Tribunal if the Settlement Agreement isn’t reached. 

Additionally, it highlights that the agreement is "subject to contract," indicating that it will only become legally binding once both parties have signed the final agreement.

13. Signing separate copies of the agreement

This section may specify that the Settlement Agreement can be executed in counterparts, meaning each party can sign separate copies of the agreement, and when combined, they form a legally binding document.

14. Signing

The signing section is where both parties, the employer, and the employee, officially agree to the terms and conditions of the Settlement Agreement by signing the document. It’s important that each party signs the agreement with the date of signature to establish its legal validity.

How to enforce a Settlement Agreement

A Settlement Agreement is a legally binding contract, so its enforcement can be sought through the courts if one party fails to adhere to its terms. Before going to court, however, it’s advisable to attempt to resolve any breaches through mediation or alternative dispute resolution methods.

Negotiating a Settlement Agreement

Negotiating a Settlement Agreement requires a collaborative and pragmatic approach. Both parties should be willing to discuss their needs openly and compromise to reach a resolution that’s mutually agreeable. With the support of legal advisors, negotiations can be conducted efficiently and effectively, leading to a clean break and an end to any potential disputes.

Does a Settlement Agreement have to include notice pay?

The inclusion of notice pay in a Settlement Agreement depends on the circumstances of the termination of employment. If the employee is required to work during their notice period, the Settlement Agreement may include notice pay and any accrued holiday pay. 

However, if the employee is placed on garden leave, they may not be required to work during the notice period, and notice pay may not be applicable.

Can a Settlement Agreement be withdrawn?

Once both parties have signed a Settlement Agreement and the required legal formalities have been completed, it becomes legally binding. As such, it can’t be withdrawn unless both parties agree to do so in writing. Once agreed upon, the withdrawal of the Settlement Agreement must also follow the required legal procedures.

Get legal assistance from LawBite

Settlement Agreements are valuable tools in resolving employment disputes and ending the employment relationship on amicable terms. As a small business owner or HR professional, understanding the legal implications and requirements of a Settlement Agreement is critical. Navigating the complexities of employment law and drafting a comprehensive Settlement Agreement that protects your small business while ensuring a fair resolution for all parties involved can be challenging. That's where LawBite comes in as your trusted partner and expert legal advisor.

By choosing us for your Settlement Agreement drafting needs, you gain access to expertise that ensures your agreements are legally binding, enforceable and tailored to your requirements. To find out more book a free 15 minute consultation with a lawyer or call us on 020 3808 8314.


Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

Free legal support for businesses

The LawBite Free Essentials Plan acts as your very own legal assistant, ready to provide expertise and guidance on the common legal issues that SMEs and businesses face.

Free Templates
  • X 3 legal document templates
  • Drafted by our expert lawyers
  • New documents added every month
Legal Healthcheck Tools
  • Business-specific surveys
  • Understand how compliant you are
  • Checks in, GDPR, IP, Brexit and more
Resources, Webinars and Articles
  • Access to the latest LawBite events
  • Legal guides for businesses
  • Smarter business law videos