Employment settlement agreements: Key considerations

Employment settlement agreements are legally binding contracts between an employer and an employee that include the terms of an agreed departure or resolution of a dispute. These agreements, previously known as compromise agreements, allow employees to waive certain employment rights in exchange for compensation or other benefits. Understanding your rights and obligations before signing one is crucial.

Key features of settlement agreement

• Voluntary Participation: Both the employer and employee must enter into the agreement willingly and the employee should not be coerced or placed under undue pressure
• Independent Legal Advice: Employees must seek independent legal advice to ensure they understand the terms
• Written Agreement: To be legally enforceable, the agreement must be in writing
• Settlement of Specific Claims: The document must clearly state which claims are being settled to prevent future disputes

How long do you have to consider a settlement offer?

A common concern for employers and employees is how long to offer for time to consider an offer before making a decision. The guidance from ACAS (the Advisory, Conciliation and Arbitration Service) suggests a 10-day period to review a written settlement agreement.

However, recent case law has provided clarification on verbal offers and deadlines.

In Gallagher v McKinnon’s Auto and Tyres Ltd [2024] EAT 174, the Employment Appeal Tribunal (EAT) ruled that an employer giving an employee a 48-hour deadline to accept a verbal settlement offer did not amount to undue pressure or improper behaviour. The Tribunal clarified that the ACAS-recommended 10-day timeline applies to written offers, not verbal ones. While employees should be given reasonable time to consider offers, a shorter deadline for verbal agreements is not automatically considered coercive or unfair.

Why employers and employees use settlement agreements

Employers may offer a settlement agreement to:

• Avoid lengthy and costly tribunal claims
• Protect business interests by including confidentiality clauses
• Ensure a clean break with no further claims

Employees may benefit from a settlement agreement by:

• Receiving financial compensation beyond statutory redundancy pay
• Avoiding the uncertainty of a tribunal claim
• Negotiating better exit terms (e.g., a reference letter or extended notice period)

Seek expert legal advice before signing

While settlement agreements can be beneficial to both parties, they must be compliant with, amongst other things, section 203 of the Employment Rights Act to validly settle statutory claims (such as unfair dismissal and unlawful discrimination)  it’s essential for employers to prepare these in a way that complies with applicable legal obligations and for employees to be able to fully understand what rights are being waived. Seeking independent legal advice ensures that the agreement is fair and that you are not accepting an offer under undue pressure.

If you are dealing with exit terms and a settlement agreement, Tees Law is here to help. Our experienced employment law specialists can prepare, review and advise on such agreements and the best course of action.

For more guidance, get in touch with Tees Law:

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