The primary aim of a settlement agreement between an employer and an employee is initially to protect the employer from potential legal claims by the employee. In return for the employee relinquishing their rights to pursue such claims, the employer pays a mutually agreed sum as compensation.

Beyond this central exchange, a settlement agreement often encompasses various other terms, including clauses related to intellectual property, confidentiality, restrictive covenants, and more. Frequently, the agreement also serves as the legal mechanism that terminates the employee’s contract of employment, meaning there is no formal resignation or dismissal, although this can vary depending on the specific circumstances.

A settlement agreement becomes a legally binding contract once it is executed. This involves both parties entering into the agreement (sometimes formalized as a deed) and typically also requires the employee’s legal advisor to sign a separate certificate confirming that advice has been provided (more on this later). However, in most cases where the document includes a waiver of statutory employment rights (as opposed to just contractual rights), it is mandatory, or at least highly vulnerable to challenge if it does not strictly adhere to the statutory requirements that supersede settlement agreements.

These crucial statutory requirements are primarily outlined in section 203(3) of the Employment Rights Act 1996 and are reflected in numerous other pieces of legislation, providing an additional layer of protection for the employee.