The Republican governor took responsibility for his administration in the settlement, but he did not admit any criminal wrongdoing.
"The governor acknowledges that the evidence strongly indicates wrongdoing by his administration with regard to personnel actions with the merit system," the judge said in a five-page order dismissing the charges.
Fletcher's administration was accused of illegally giving protected state jobs to political supporters. Several current and former state employees testified before a grand jury investigating the scandal that they were passed over for promotions, transferred, demoted or fired because of their political leanings.
Fletcher was indicted in May on misdemeanor charges of conspiracy, official misconduct and political discrimination. He issued a blanket pardon for anyone else in his administration who might be charged.
Under the settlement agreement, four Fletcher appointees to the state Personnel Board will have to resign to avoid any appearance of a conflict in future cases. The judge stressed that, "In no way is this action taken in response to any conduct related to their service, which is commendable."
The agreement also says volunteers acting on behalf of the governor's office will be bound by the Executive Branch Ethics Code.
David E. Melcher, assigned to the case as a special judge, said the governor acknowledged that actions in the administration were inappropriate, he regrets their occurrence and he accepts responsibility for them as head of the executive branch of government.
"This sincere expression of ultimate responsibility, however, is not an admission in any way of any criminal wrongdoing by the governor nor directly on behalf of the governor," the judge wrote.
Melcher dismissed the charges with prejudice, meaning they can't be brought again.
By settling the matter, Fletcher can seek re-election without the shadow of criminal charges looming over him.
Attorney General Greg Stumbo, who has long been at odds with the Republican governor and is considered a possible Democratic candidate for governor, could now launch a gubernatorial campaign without breaking his promise not to challenge Fletcher while the case was pending.
"It's over, and I think the people all across the Commonwealth of Kentucky will be very pleased that this sad ordeal is over," Fletcher said while at the Kentucky State Fair Thursday.
The agreement Melcher signed calls for the resignations of four people who were appointed by Fletcher to the state Personnel Board so employees can have grievance hearings free of the appearance of impropriety. Fletcher will have to select replacements from lists supplied by Stumbo.