What is a settlement agreement?

A settlement agreement (formerly known as a compromise agreement) is a formal and legally binding agreement made between an employer and an employee (or ex-employee as the case may be) under which an en employee agrees not to pursue any claims in relation to his or her employment or its termination in return for a financial settlement.

What is the difference between a ‘compromise agreement’ and a ‘settlement agreement’?

By virtue of reforms made under the Enterprise and Regulatory Reform Act 2013 (‘the ERRA’), compromise agreements were renamed as ‘settlement agreements’ with effect from 29 July 2013. It was thought that the word ‘settlement’ more accurately describes an agreement which seeks to deliver a satisfactory solution for both parties. There is no difference as such between the two. The purpose of the name change was to improve the understanding of the purpose of the agreement.

It should be noted though that as part of the reforms under the ERRA, discussions and negotiations relating to an offer of a settlement agreement cannot be used in evidence in an ordinary unfair dismissal claim, unless there has been improper behaviour by a party.

When is a settlement agreement used?

An employer may consider using a settlement agreement as an alternative to going through disciplinary or performance review or redundancy procedures with the employee concerned.

A settlement agreement may be used to resolve all existing disputes and possible future claims once and for all without the necessity of going through tribunal or court proceedings.

Settlement agreements may also be used to settle serious grievances raised by employees, such as constructive dismissal and unlawful discrimination claims.

What are the benefits of using a settlement agreement?

A settlement agreement would be appropriate where the employer desires to take an employee out of the workplace quickly, as it saves the employer going through time-consuming statutory procedures.

A settlement agreement will generally avoid the delays and uncertain outcome of a tribunal or court hearing while at the same time it shields the employer from potential unfavourable publicity.


A settlement agreement is a fast and straight-forward way to achieve a mutually satisfactory settlement for both the employer and employee whilst avoiding the costs and uncertainty of potential legal action.

However, settlement agreements are complex legal documents which must fulfil a number of statutory requirements in order to be legally binding. Furthermore, an employee must receive independent legal advice from a ‘relevant independent adviser’ within the meaning of the legislation governing settlement agreements before signing such an agreement. It is therefore recommended that the preparation and review of settlement agreements should always be carried out by professionals. London Registrars has many years’ experience of compromise and, latterly, settlement agreements.
If you wish to find out more about settlement agreements and our employment consultancy, give us a call on 020 7608 0011.