Settlement agreements: what employees should know

What a settlement agreement actually is

A settlement agreement is a legally binding contract between an employer and an employee. It usually ends the employment relationship on agreed terms and settles any potential claims the employee might have against the employer. You will often see them offered in redundancy situations, after a dispute, or when both sides want a clean break without going to an employment tribunal. The agreement typically sets out a termination payment, notice arrangements, a reference, confidentiality obligations, and a waiver of claims. It is not a reward or a favour – it is a negotiated document. You are not obliged to sign it, but if you do, it has serious legal consequences.

Why independent legal advice is essential

For a settlement agreement to be valid, you must receive independent legal advice on its terms and effect. This is not just good practice; it is a legal requirement under the Employment Rights Act 1996. The advice must come from a relevant independent adviser, such as a solicitor, a barrister, or a certified trade union official. Your adviser must be identified in the agreement and have professional indemnity insurance. Crucially, they must advise you on whether you have a claim and what you are giving up by signing. Without this advice, the agreement may be void, meaning you could still bring a claim later. Your employer will usually contribute towards your legal fees – often between £250 and £500 plus VAT, sometimes more. You choose your own solicitor. Never use the same solicitor as your employer, and never sign before receiving advice.

Negotiating the terms: what to look at

Negotiation is normal and expected. Employers often make an initial offer that can be improved. Key areas to examine include:

• Termination payment: The amount, and how it is taxed. The first £30,000 of a non-contractual termination payment is usually tax-free, but notice pay, holiday pay, and bonuses are taxable.
• Notice and pay in lieu: Whether you receive notice, pay in lieu of notice (PILON), and whether pension contributions continue during notice.
• Holiday, bonus, and commission: Any accrued but untaken holiday, pro-rata bonus, or commission owed.
• Reference: The exact wording, and who will provide it. An agreed reference can be valuable.
• Confidentiality and non-disparagement: Check whether these are mutual or only bind you.
• Restrictive covenants: Make sure they do not extend beyond your existing contract.
• Benefits: Private health insurance, company car, life cover, and other perks until your end date.
• Practical support: Outplacement, training, or a contribution to legal costs beyond the basic advice.

The effect of signing on future claims

When you sign, you waive the claims listed in the agreement. In most cases, this covers all claims arising from your employment or its termination up to the date of the agreement. That includes unfair dismissal, discrimination, unpaid wages, breach of contract, and holiday pay claims. You cannot later bring those claims in an employment tribunal or court. There are some exceptions. You cannot waive accrued pension rights, and you cannot waive claims that have not yet arisen – for example, a personal injury that you do not know about at the time of signing, or a future act of discrimination. However, some agreements try to cover future claims, and their enforceability depends on the exact wording and circumstances. Your solicitor will explain what you are giving up. You should also check for a tax indemnity clause: if HMRC later challenges the tax treatment of your payment, you may have to repay some tax. Finally, if you breach confidentiality, you could be sued.

Practical steps before you sign

Do not rush. You usually have at least ten working days to consider the agreement, and you can ask for more time if needed. Instruct a solicitor who specialises in employment law early. Keep copies of all correspondence, including the offer and any draft agreement. Ask questions – no question is too basic. Negotiate if something feels unfair or unclear. Think about tax, benefits, and your notice period. If you have an ongoing grievance or tribunal claim, check how the agreement deals with it. Remember that a settlement agreement is voluntary. You can refuse to sign, but your employer may then follow a different process, such as performance management or dismissal. Do not let anyone pressure you into signing on the spot.

Where to get help and what to expect

Choose a solicitor with experience in settlement agreements. Many offer a fixed fee for reviewing and advising on the document, and some will negotiate on your behalf for an additional cost. Your employer's contribution will usually cover the basic legal advice, but complex negotiation or additional work may cost more. Trade unions can also provide advice and representation. Always ensure the advice is independent from your employer. Ask for a copy of the agreement and any supporting documents before your appointment. A good adviser will explain the terms in plain English, highlight risks, and help you decide whether to sign or negotiate further. Taking the time to get proper advice is the most important step you can take.