A settlement agreement (formerly known as a compromise agreement) is a legally binding document made between an employer and employee on the termination of employment. It can be used in a variety of situations including redundancy, resignation or dismissal for conduct/capability reasons, however more often than not it is used when the parties have a dispute.
The agreement serves to draw a line under the employee’s employment, thus enabling the employer to swiftly remove the employee from the business, without the risk of facing a tribunal claim. In return for agreeing to enter into the compromise agreement, and thus waiving all rights to pursue any claims that the employee may have against the employer, the employee receives a financial settlement.