Settlement Agreements – Employer FAQs and changes expected in 2026 and beyond
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What is a settlement agreement?
A settlement agreement (known before as compromise agreements) is a legally binding agreement between an employer and employee (and workers, though the term, employee, will only be used to cover both for ease) to bring their employment to an end.
Under the terms of the agreement, often both parties stand to benefit, whereby an employer is guaranteed that the employee won’t bring any claim against them (except for the carve-outs, below) and the employee receives a payment in return for that guarantee – often known as a severance/termination/compensation payment. Of course, there are additional types of obligations/restrictions, though that is the crux of a settlement agreement.
Does the employee need to have a claim in the first place?
Employees don’t necessarily need to have a claim or a particular dispute in order to be offered a settlement agreement, though in the majority of cases, a claim or dispute (or the expectation of one) will often be the reason for this.
If an employer needs to dismiss employees due to performance or conduct issues, or make them redundant, then specific processes must be followed to avoid a claim for unfair dismissal. A settlement agreement can be used as a means to bypass any redundancy/disciplinary/dismissal processes and proceed straight to a termination – avoiding the risk of any costly claims.
Additionally, even if there isn’t a redundancy situation or performance/conduct issue, an employer could simply use a settlement agreement to cut headcount.
What claims are waived?
Provided the settlement agreement is adequately drafted (which we can prepare or review for employers), an employee would agree to waive all types of claims, whether employment related or not, except for a few.
An employee cannot be required to waive claims for:
- enforcing the terms of the settlement agreement itself – i.e. if the termination payment has not been paid, reference has not been provided, etc.
- any personal injury that the employee is not or cannot be reasonably expected to be aware of at the date of the agreement; and
- accrued pension rights.
Can future claims be waived?
Recent case law (how cases have been decided in the past) indicates that it’s possible for employers to be able to settle claims that have not yet arisen or are not yet known about at the time of signing.
However, it is important for the settlement agreement to reflect this and for the correct and intricate wording to be used.
What can you do if the employee brings a claim anyway?
If an employee brings a claim that they had waived, then an employer can take a number of measures.
Provided the settlement agreement allows for these, an employer can:
- refuse to pay the termination payment;
- require repayment of the termination payment; and
- require payment of its costs (incl. legal costs) for suing the employee for the termination payment or having to defend themselves against the waived claim.
Depending on how the settlement agreement has been drafted, employers could also take the above steps for other breaches, too – i.e. speaking/posting about confidential matters, refusing to abide by their restrictive covenants, failing to return company property, etc.
Do you need to update your settlement agreement templates?
On 10 October 2024, the Employment Rights Bill (“Bill”) made headlines as part of Labour’s promise to “Make Work Pay” and introduced 28 significant reforms to the employment landscape – you can find more on that here and here. One of these reforms include a ban on confidentiality clauses covering harassment and discrimination at work – meaning employees cannot be prevented from speaking about allegations of work-related harassment or discrimination.
Although most employers will have a regularly used settlement agreement template already in place, as a result of these expected changes, it would be best practice to have those reviewed and be ready for the impending changes – due to take effect in stages throughout 2026 and 2027.
Additionally, irrespective of the Bill, if the template that you use doesn’t account for the above recommendations, then you could be at risk of not being in the best position to protect your business – despite having paid employees in the first place for peace of mind.
Other resources
For more detailed guidance on the intricacies of how settlement agreements should be drafted, please see our other guidance, though it’s always best to receive up to date legal advice.
If you are an employee and you need some guidance specific to your circumstances, please click here.
Both employers and employees are more than welcome to contact our specialist employment team with their enquiries.
All information is true as at the date of preparing this article. Please always consult the latest legislation or Government guidance for accurate information.
