Settlement Agreement vs Compromise Agreement
Last updated: February 2025
Quick Comparison
| Aspect | Settlement Agreement | Compromise Agreement |
|---|---|---|
| Terminology | Current term since 29 July 2013 | Former term used before 29 July 2013 |
| Legal effect | Fully binding waiver of employment claims | Identical legal effect; same thing under the old name |
| Requirements | Writing, independent advice, specific claims identified | Identical requirements |
| Legislation | Employment Rights Act 1996 as amended | Employment Rights Act 1996 before 2013 amendment |
What Is a Settlement Agreement?
The current legal term for a binding agreement in which an employee waives their right to bring employment claims in exchange for a financial settlement, typically on termination.
Key Features
- • Must be in writing and relate to specific complaints or proceedings
- • Employee must receive independent legal advice
- • Adviser must have professional indemnity insurance
- • Replaced the term 'compromise agreement' from 29 July 2013
Best For
- • Negotiated exits where both parties want a clean break
- • Resolving disputes without tribunal proceedings
- • Redundancy situations with enhanced terms
What Is a Compromise Agreement?
The former legal term for what is now called a settlement agreement. Functionally identical but the terminology was updated by the Enterprise and Regulatory Reform Act 2013.
Key Features
- • Same legal effect as a settlement agreement
- • Term used before 29 July 2013
- • Still valid if entered into before the name change
- • Same requirements for independent legal advice and writing
Best For
- • Historical reference; no longer used for new agreements
When to Use a Settlement Agreement
Use a settlement agreement for any negotiated exit or dispute resolution from 29 July 2013 onwards. This is the legally correct current terminology.
When to Use a Compromise Agreement
Do not use a compromise agreement for new agreements. The term is only relevant for historical agreements entered into before 29 July 2013.
Which Does Your Business Need?
They are the same thing. Settlement agreement is the current, correct term. If you are entering into a new agreement, use 'settlement agreement'. Pre-2013 compromise agreements remain valid and enforceable under their original terms.
FAQ
Why did the name change from compromise agreement to settlement agreement?
The Enterprise and Regulatory Reform Act 2013 changed the name to make the concept more accessible and less legalistic. The government felt 'settlement agreement' more clearly described the purpose of the document. The legal requirements remained identical.
What claims can be settled in a settlement agreement?
Most employment claims can be settled, including unfair dismissal, discrimination, unpaid wages, and breach of contract. However, certain rights cannot be waived, such as accrued pension rights, personal injury claims the employee is not yet aware of, and future claims that have not yet arisen.
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