Jean Weeks was accused by Essex county council of fraudulently taking retirement benefits while continuing to work as a teacher, sparking a police investigation and legal action by the Government. But Mrs Weeks, aged 60, counter-sued the authority, the school and the Education Secretary.
The case was due to be heard in the High Court next month, but it has now been resolved through mediation, with the three parties jointly providing Mrs Weeks with a substantial undisclosed sum.
Mrs Weeks spent her entire teaching career at FitzWimarc school in Rayleigh, Essex, where she began work at the age of 21. In May 1999 she retired as deputy head and began receiving pension benefits, but returned to work three days a week in a pastoral role. The council began investigating the payments because of concerns they might be illegal, even though they had been approved by the Teachers' Pensions agency.
In March 2000 Mrs Weeks was told to leave the school "that minute" or the police would be called. Investigations by police and the DfES were launched shortly afterwards, both of which have now been cancelled.
The scandal led Mrs Weeks to suffer from severe depression, panic attacks and sleeplessness.
In a joint statement, Essex council, the Government, the school's governors and Mrs Weeks said they "regretted any misunderstandings between them in the past".
It added: "The governors pay tribute to Mrs Weeks's teaching skills and overall contribution to the success of the school over many years of dedicated service.
"They recognise that Mrs Weeks has been through a very difficult time and wish her well in her retirement. Mrs Weeks wishes the school continued success."