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What is a settlement agreement?

What is a settlement agreement?

Settlement agreements (previously known as “compromise agreements”) are common place but not always fully understood.  So, exactly what are they?  Put simply, they are a contract between an employer and employee which is usually used to resolve any disputes which have arisen within the employment relationship.  Under this type of agreement, an employee will agree not to pursue specific legal claims against their employer, as set out within the agreement, usually in return for a sum of money from the employer.  Typically, a settlement agreement will be proposed at the end of the employment relationship, but this is not always the case.

Settlement agreements are usually “without prejudice” which means they cannot be referred to in any subsequent legal disputes.  If an employer wishes to explore the possibility of a settlement agreement, the employer may suggest that both parties engage in a “protected conversation”.  By holding such a conversation both parties can freely propose the terms of the settlement agreement such as financial and other termination arrangements, and enter into negotiations.  Such negotiations would remain confidential and not be admissible as evidence in any subsequent legal proceedings, unless there is a discrimination claim or the employer acts improperly, for example by putting the employee under pressure to agree.

For a settlement agreement to be valid an employee is also required to obtain independent legal advice, usually from a solicitor, on the terms of the agreement before they sign it.  If the employee fails to do this, the agreement will not be enforceable.

For advice on settlement agreements, please contact Miranda Mulligan in our Employment law team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. 

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