SETTLEMENT AGREEMENTS

Settlement Agreements for Employers

What Is a Settlement Agreement?
A settlement agreement is a legally binding contract between an employer and an employee, used to resolve an employment dispute or bring employment to an end on agreed terms. In exchange for a settlement payment and other agreed terms, the employee agrees not to pursue certain legal claims against the employer, such as unfair dismissal or discrimination. For employers, a well-drafted settlement agreement offers certainty, protects the business from future claims, and allows for a clean, professional separation.

When Employers Use Settlement Agreements
Settlement agreements are commonly used during redundancies, performance-related exits, disciplinary matters, or workplace disputes. They can be offered at any stage of the employment relationship, and are often raised as part of a "protected conversation," which allows employers to discuss termination terms without the discussion being used as evidence in a later unfair dismissal claim.

The Legal Requirements
For a settlement agreement to be legally valid in the UK, it must:

• Be in writing
• Relate to a specific complaint or proceedings
• Confirm that the employee has received independent legal advice from a qualified adviser
• Identify the adviser and confirm they have relevant insurance
• State that the applicable statutory conditions have been met

Employees are legally required to obtain independent legal advice before signing, which is typically why employers contribute towards the employee's legal fees as part of the agreement.

The Negotiation Process
Settlement agreements are usually negotiated directly between employer and employee, sometimes with support from ACAS (the Advisory, Conciliation and Arbitration Service), particularly where a formal dispute has already been raised. As an employer, having experienced HR support during this process helps ensure the terms offered are fair, proportionate, and legally sound — reducing the risk of the agreement being challenged later.

What's Typically Included
A settlement agreement will usually cover:

• Financial compensation, including any tax-free element
• Termination date and notice arrangements, including garden leave
• Confidentiality and non-disclosure terms
• References
• Post-employment obligations, such as restrictive covenants or non-compete clauses

Key Risks for Employers
Getting a settlement agreement wrong — whether through unclear terms, incorrect tax treatment, or failing to address discrimination risk — can leave a business exposed to future claims rather than protecting it. It's important that agreements are properly drafted and comply with current employment law, including equality legislation.

How Stance Legal Can Help
At Stance Legal, we support employers through every stage of the settlement agreement process — from initial strategy and protected conversations, through to negotiation and finalising terms. Our goal is to help you resolve disputes efficiently, protect your business, and part ways with employees professionally and fairly.

This page provides general information for employers and should not be relied upon as legal advice. For guidance on a specific situation, please contact Stance Legal directly.