When an employer and employee agree to end an employment relationship on mutually agreed terms — typically involving some form of financial payment in exchange for the employee waiving their rights to bring certain employment claims — the document that records this agreement is a settlement agreement. Understanding what it is and when it is used helps founders engage with employment lawyers and HR advisers more effectively.
A settlement agreement is a legally binding contract between employer and employee that sets out the terms on which employment is ending or has ended. It typically includes the payment being made, a waiver of specified employment claims, any agreed reference wording, and confidentiality provisions. For a settlement agreement to be legally valid, the employee must receive independent legal advice on its terms before signing — a requirement that the employer usually funds.
Settlement agreements are used in a range of circumstances — ending an employment where there is a dispute, managing an exit where both parties want a clean break, or resolving a grievance or disciplinary process. They are not appropriate for every employment ending and should not substitute for a fair process. Our guide to settlement agreements for UK employers covers when they are appropriate and what the process involves.