However, it becomes different in the professional setting, especially when misunderstandings happen between management and employees. Often, the issues stem from employee performance or grievances in the employee handbook. Since management follows company protocols, the chances of these issues repeating results in higher and graver consequences for employees if they cannot keep their attitudes or performance in check. When worse comes to worst without any resolutions, there must be an employment settlement agreement between the employer and employee. What is an employment settlement agreement, and what is its significance for employees and their employers? The article contains valuable information about the agreement, including its definition, components, and a guide to help management create one. A section also answers frequently asked questions about the document.

What Is an Employment Settlement Agreement?

Settlement agreements, or compromise agreements, are prevalent in the workplace, used by employers and the human resource departments of companies when settling work-related disputes. Employment settlement agreements serve as a negotiating tool that management uses to discuss specific terms and conditions regarding the exit of an employee in the presence of complex and sensitive issues. These issues include redundancy situations, allegations of discrimination, or unfair or wrongful termination. An employee that plans to sign the document must first consult with a labor attorney or an employment specialist. It gives the employee to determine whether the dismissal process is fair and equitable under the circumstances. For a termination settlement to be just, there must be a merit of the tribunal claim of the employee, negotiation of a higher payout, or better alternative terms after. An employee also has the right to receive legal advice on the implications of signing the settlement agreement, including future tribunals claims against the employer.

According to the United States Equal Employment Opportunity Commission, statistical information about the Enforcement and Litigation Statistics that focuses on the charges of employment discrimination and resolutions, settlement negotiations occur over 5,471 times in different statutes, equitable to 7.7 percent.

Components of an Employment Settlement Agreement

When workplace disputes happen, before employers and employees settle their differences in court, the company asks the employee to sign the settlement agreement. The document ranges from anywhere between 5 to 25 pages and can become too overwhelming to read. In most cases, employees do not have the time and opportunity to navigate the document. There are common clauses that a person can find in a settlement agreement, and the section below equips the reader with a better understanding of it. The following contains valuable information about the general components that a person can see in an employment settlement agreement.

Whereas clause: This section of the settlement agreement is often the introduction portion. The introduction is the part of the agreement that spells out the happenings of the case as of the moment. It contains information about the filing date of the case, the type of claim that the individual files, and an explanation that both parties wish to resolve the issue without litigation to reduce expenses. The section also indicates whether the defendant is guilty or not guilty.Method of acceptance clause: This section of the settlement agreement talks about the different kinds of rules discussing the process of how an individual accepts the agreement. It guarantees that no confusion happens between the parties. The method of acceptance clause tells the parties of the agreement what they need to sign, who to send necessary documents to, and when they have to deliver for the acceptance to the agreement to be in effect. If a person fails to follow the necessary steps in the clause, then there is a chance that the person did not accept the agreement.Dismissal clause: Many settlement agreements involve payments in exchange for dismissing the claim. The dismissal clause in the settlement agreement details the procedure of how and when the complainant can dismiss the pending claim.Payment or settlement clause: In this section of the settlement agreement, the document explains the amount of money, the process of payment, and the tax deductions. When digesting the contents of this section, it is best to consult with a tax attorney with questions regarding W2 wages and 1099 income if both of these are part of the settlement agreement.Waiver of claims clause: This section of the agreement is the most vital part of the settlement. It contains an explanation of the claims an individual is waiving in exchange for monetary value. This section of the employment settlement agreement is often the lengthiest that includes a list of claims that a person waives upon signing the agreement. Most defendants that engage in the settlement agreement indicate claim waivers that are known and unknown to the individual at the time of signing. At times, there is a general waiver that states the defendant waives any claims under the law and a specific waiver that waives specific claims stemming from the filing of the case. This section of the employment settlement agreement is the most critical part and must undergo a review with a lawyer. The consultation period with a lawyer aids in discussing all the potential claims the defendant has and enables them to make informed and knowledgeable decisions on whether or not to waive those claims.No future litigation clause: In most cases, defendants will want the other party to refuse to engage with scenarios that someone else can use against them. The section states that the other party can respond to subpoenas, knowing that they are not eligible to gain any amount in future settlements.No rehire clause: Most employers will not rehire employees or ask them to come to work after suing them for obvious reasons. Indicating the no rehire clause into the settlement agreement gives the employers the explicit right to reject future applications coming from the individual. In some cases, it allows the employer to terminate the employment contract if they accidentally rehire the person, even in affiliate and subsidiary companies.Owner of claims clause: The section of the agreement speaks about the confirmation of the complainant regarding the non-selling and non-transferring of the settlement proceeds to another entity.Confidentiality clause: If the employee signs the settlement agreement for the employment claim, employers will want to keep things confidential. The confidentiality agreement comes in various forms, depending on the arrangement between employer and employee. However, the most common scenario is that the employee needs to keep the terms and conditions and the agreement itself confidential. Certain provisions allow an employee to share the contents and existence of the agreement to some people, including a spouse, an attorney, or a tax advisor. If an employee speaks about the agreement outside specific individuals, there is a breach of contract, and the employee must repay the acquired money along with additional damages.Non-disparagement clause: The section prevents the employee from saying negative comments about the company or the employer, whether verbal or written. If the employee says things about the defendant or plaintiff, true or untrue, there exists a breach of contract with repayment of dues and additional fees.Savings clause: This section of the settlement agreement indicates that if a portion of the document is illegal or invalid, the rest of the terms are unaffected and remain in place. Consideration or revocation clause: The law gives the employee some time to revoke or reconsider the claim depending on the filed suit. Usually, the court gives the complainant 21 days to withdraw the claim. In certain cases, some provisions allow the employee to revoke the claim seven days after signing the agreement. The section also indicates the procedure of notifying the other party of the revocation of the suit.

How To Write an Employment Settlement Agreement

Settlement agreements deal with employer and employee disputes without going into trial or extending the trial if the lawsuit is already ongoing. An employment settlement agreement must undergo scrutiny in its draft and execution. When writing an employment settlement agreement, it is always critical to have a knowledgeable attorney with you or have them draft a suitable agreement for the case of an employee. The section below details helpful tips in creating an effective employment agreement.

  • 1. Make the Necessary Preparations in Advance

    When developing a settlement agreement or building up the case for a trial, attorneys still need to develop trial timelines, case themes, settlement, and evidentiary checklists. Attorneys are also responsible for specifying unique issues and specific takeaways to aid employees in dealing with settlement conversations. Mediation sessions require the most preparation. The goal of mediation is to bring a resolution to the claims and secure results through a signed memorandum. In mediation meetings, the attorney must have a pre-drafted settlement agreement.

  • 2. Differentiate Between Settlement Negotiations and Agreements

    A settlement agreement is a contract. As such, it must include necessary information, including offers, acceptances, mutual agreements on terms, and considerations. Exploring various settlement options allows the parties to distinguish between essential terms that require identification and communication before a binding offer.

  • 3. Be Cautious of Boilerplate Clauses

    Most attorneys have a template or pre-draft of an agreement to help them communicate the most necessary information to their clients. Attorneys find the danger in drafting the agreement in assuming the usual provisions without analyzing, modifying, and appropriating sections under certain circumstances. Integration clauses are present in employment settlement agreements to avoid future misunderstandings and arguments when one party retains claims against the other. Some clients will not want this in their agreements. Writing the confidentiality or non-disparagement clauses is necessary from a defensive stance. There are instances that an organization distrusts their employees to keep things confidential, and writing the non-disparagement clause will bring more harm than good. Release clauses are also essential in any settlement agreement. It is necessary to identify all the claims that the client needs to release. Also, make sure that the client has the legal capacity to release claims about the issue.

  • 4. Speak with Tax Counsels

    Settlement agreements deal with settlement payments that carry over tax consequences on both parties. Understand the consequences in advance to not make unnecessary commitments for the client. There are instances that a client cannot lawfully keep or regret in the long run.

  • 5. Indicate Some Enforcement Provisions

    Despite having a settlement agreement, disputes can arise if there is poor drafting, bad faith, or buyer remorse. It is best to anticipate the possibility of these happening and the possible steps of resolving them. Guarantee there is an enforceable agreement to arbitrate these scenarios according to law. The agreement must come from the specific jurisdiction or venue of the document and specify whether the losing party shoulders the expenses and fees of its enforcement.

  • 6. Schedule Essential Reviews with the Client

    An attorney must be responsible for sending the necessary documents to their clients. When sending the draft of the settlement agreement, make sure it is consistent with the attorney’s and client’s expectations and understanding. To make sure that a client understands the content of the settlement agreement, the best thing to do is to review its entirety in their presence, explaining each section. A client has already put in emotional and financial investments to the case, and as such, the attorney must put the best interest of the client first and ensure their effort is consistent with the client’s expectations.


What is the purpose of a settlement agreement?

The principal purpose of a settlement agreement is to resolve disputes between employers and employees by coming into a mutual agreement. A settlement agreement is usually in the civil law setting, where the parties agree to an outcome in advance.

What is an EEO settlement?

An EEO (equal employment opportunity) settlement focuses on addressing discrimination claims between an employer and an employee.

Why are employers offering settlement agreements to employees?

Employers offer settlement agreements to employees to negotiate and mutually agree on terms regarding the termination of the contract. It also establishes a clean break of employees from the organization without bringing claims to a higher court or tribunal for more money.

Employment settlement agreements are vital documents in the business sector, especially for employers. Each document is unique, depending on the situation or scenario of the employer and employee. The employment settlement agreement is beneficial for terminating employee contracts, employee redundancy, settling employment disputes, and protecting the employer’s interest. Writing an employment settlement agreement requires the aid of an attorney at all times. Draft the document with an attorney and familiarize yourself with its contents by downloading from the 4+ SAMPLE Employment Settlement Agreement in PDF | MS Word above. Get yours today, only at