Settlement agreements: dealing with the past

Previously known as a compromise agreement, a settlement agreement is a legally binding contract between an employee and their employer and is usually used to terminate the employment relationship on mutually agreed terms.

As the name implies, settlement agreements can often be used to bring about a conclusion to (ie. to settle) a workplace dispute. In this instance, an employer will usually provide a severance payment in return for the employee's agreement to waive their right to bring almost all types of legal claim under the agreement. It is often a lengthy contract; however, it will be legally binding once it has been signed.

As to why an employer would want to bring an end to an employee's employment using a settlement agreement, Sophie Wahba, a solicitor at Wright Hassall, provides further insights. According to Wahba, ‘they are used when the employment relationship between an employer and an employee inevitably breaks down; this could be due to several reasons and the most common scenarios are due to an employee's conduct, performance, capability, or an employee's role being at risk of redundancy’.