What is a settlement agreement?

A settlement agreement is a legally binding contract between an employer and an employee that sets out the terms of the settlement, usually when employment ends, and the claims the employee agrees to waive. At its core, it is a simple trade: your employer offers something of value, usually a financial package (sometimes with other bits too, like an agreed reference), and you agree not to bring legal claims connected to your employment or the issues being settled. Both sides record that understanding in writing so they know exactly where they stand (e.g. neither side can back out five minutes later).

Settlement agreements are:

• almost always offered at the employer’s initiative (either side can propose one; see Acas Code of Practice on settlement agreements)

• often used to settle workplace disputes or grievances (but a live dispute isn’t required)

• sometimes signed while employment continues, allowing both sides to move forward without formal procedures

What’s the difference between a settlement agreement and a compromise agreement?

A compromise agreement is simply the old name for what we now call a settlement agreement. The change came with the Enterprise and Regulatory Reform Act 2013, which referenced the new name when it came into force in July that year.

The Government wanted a name that sounded more positive and that better reflected the purpose of the agreement: to settle legal issues and give both sides certainty, rather than to compromise. The legal effect remained exactly the same.

Today, settlement agreement is the recognised term in UK employment law. However, in some HR and legal circles you may still hear people use the older phrase compromise agreement, or alternatives such as exit agreement, mutual termination agreement or mutually agreed resignation. All describe the same type of legally binding contract between employer and employee.