Mr Gormley was dismissed from his job, along with three other non-executive directors from NI Water, in March 2010. He emphatically denied any wrongdoing.
Sinn Féin's Conor Murphy was the Regional Development Minister at the time. He removed the four directors from the board following an independent review team investigation into the awarding of contracts.
Mr Gormley went on to sue the political party over the contents of two press releases.
In December, a jury at Belfast High Court held that he was defamed by Sinn Féin. He received £80,000 in damages, plus full costs.
On Thursday, a statement was released from Danny Kennedy UUP MLA - who is the department's current minister.
It read: "Following the recent High Court Case in which Mr Gormley was awarded damages against Sinn Fein, he had indicated that all that he wanted from the litigation against the Department and the other defendants was an apology and the legal costs incurred in the case. In light of this statement, I felt duty bound to ensure that this was explored with Mr Gormley's legal advisers."
Mr Kennedy added:"Following tough negotiations by both parties, it was eventually possible to reach a settlement on the basis of an apology on behalf of the Department and the payment of Mr Gormley's reasonable legal costs - but without payment of damages."
As part of the apology, the Department of Regional Development stated that it "categorically acknowledges that Mr Gormley was not guilty of any personal wrongdoing or misconduct in his role as non-executive director of Northern Ireland Water. The Department further acknowledges that his removal from office did not reflect adversely in any respect on his character or integrity."
The statement added: "The Department has now apologised to Mr Gormley and has agreed to pay his costs. Mr Gormley has accepted the apology, which is all that he wished to secure from this litigation. Accordingly, the matter is now closed."
The department admitted that while Mr Gormley's dismissal was regrettable, it would now be "impracticable for the situation to be reversed".
Speaking on the development, Mr Gormley told UTV: "Well, I'm absolutely delighted. This has taken two years and 11 months, but clearly the Minister's decision today is very welcome and it finally, utterly vindicates my position that I should never have been dismissed."
Meanwhile, former minister Conor Murphy made clear his disatisfaction at the outcome.
"I have made it clear, in correspondence with the Department in recent weeks, my opposition to settling this case in these terms and it is clear that no apology has been made on my behalf," he said.