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What is a Settlement Agreement?

A settlement agreement is a contract between an employer and employee. It’s usually used as a way of paying an employee a sum of money (a compensation payment) in return for you waiving your rights to bring certain employment tribunal claims against the employer.

The agreement should be tailored to each individual’s circumstances otherwise it may not be effective. Up until July 2013 these types of agreement were known as compromise agreements.

Settlement agreements are used in a variety of circumstances when an employer and an employee agree for employment to be terminated by agreement in return for a severance package. They are particularly common in voluntary redundancy. A settlement agreement can also be a clean break between an employee and employer and with prohibitive costs of bringing or defending an employment tribunal claim, it is often a cost effective, sensible and amicable solution to resolving sometimes difficult situations at work.

For the agreement to become legally binding, you as the employee must receive independent legal advice on its terms and effect and on your ability to pursue your rights before an employment tribunal. Once you have received legal advice and both parties have signed the agreement, it then becomes a fully binding contract.