A settlement agreement offers a structured way for employers and employees to bring an employment relationship to a formal close. Used correctly, it can resolve disputes and minimise legal risk. However, for such agreements to be enforceable under UK employment law, they must meet specific legal requirements. Failing to include certain elements can invalidate the agreement, exposing employers to tribunal claims and reputational harm.

This guide outlines what employers must include to ensure a settlement agreement stands up in law based on statutory rules and best practices.

Statutory Requirements: What the Law Demands

Under section 203 of the Employment Rights Act 1996, a settlement agreement must meet several conditions to be legally binding. These conditions are not optional; they are compulsory for the agreement to effectively waive the employee’s right to bring claims in an employment tribunal.

The Agreement Must Be in Writing

A legally valid agreement cannot be verbal or informal. It must be a written document that clearly outlines the agreed terms. This ensures both parties understand their obligations and rights.

It Must Relate to a Specific Complaint or Proceedings

The agreement should refer to the precise complaint or situation it resolves. While general waivers are common, employers should include an itemised list of settled claims. These can include claims under the Equality Act 2010, Employment Rights Act 1996, or Working Time Regulations 1998.

Employee Must Receive Independent Legal Advice

The employee must have obtained advice from a qualified, independent adviser. This is usually a solicitor, but it could also be a certified trade union representative or someone from an advice centre. Importantly, this adviser must not be connected to the employer.

Insurance Cover for the Adviser

The independent adviser must hold professional indemnity insurance when the advice is given. This protects the employee if the adviser provides negligent advice.

Identification of the Adviser

The agreement must clearly name the adviser who gave the legal advice. This helps establish that the statutory condition of independent legal input has been fulfilled.

Confirmation That the Legal Requirements Are Met

The document must state that all conditions under relevant legislation have been met. This includes confirmation that the adviser is qualified and insured and that the advice covered the effect of the agreement on the employee’s ability to bring claims.

Essential Additional Clauses

While statutory elements form the foundation of a valid agreement, including practical clauses can strengthen the employer’s position and offer clarity.

  • Termination Date: The agreement should clearly state when the employment will end. This avoids confusion over notice periods and final salary calculations.
  • Financial Terms: A full breakdown of payments should be included. This covers termination payments, pay in lieu of notice (PILON), unpaid holidays, and any ex gratia amounts. Employers must also make clear which sums are subject to tax.
  • Waiver of Claims: The waiver section should be detailed. Besides statutory claims, it should include any potential contractual or common law claims. However, some rights, such as claims for latent personal injury or pension rights, cannot be waived.
  • Confidentiality Clause: Employers often include clauses requiring both parties to keep the agreement confidential and the issues that led to it.
  • Non-Derogatory Statements: It’s common to include a clause preventing the employee from commenting negatively about the business. This may be mutual to protect both sides.
  • Reference Agreement: Where applicable, the employer may agree to provide a neutral or positive reference, with the agreed wording often attached to the agreement itself.
  • Legal Fees: Employers usually contribute a fixed amount towards the employee’s legal fees. While not required by law, this supports the independent advice condition and can expedite the process.
  • Governing Law and Entire Agreement
    Clauses should confirm that the laws of England and Wales govern the agreement and that it replaces all previous agreements between the parties.

Final Thoughts

A legally valid settlement agreement protects both employer and employee by closing the door on future legal action, provided it meets the legal conditions set out in UK law. Missing even one requirement could render the agreement unenforceable.

Employers should pay close attention to statutory elements and take time to ensure that all relevant terms are clearly drafted. It’s also wise to seek support from an employment solicitor with experience in employment contracts and settlement agreements. This ensures full compliance and a clean break for both parties.