Settlement agreements explained: what to check before you sign

What a settlement agreement is

A settlement agreement is a legally binding contract between you and your employer. Usually your employer pays you a sum of money and, in return, you agree not to bring certain legal claims against them. It often comes up when a job is ending, but it can also settle a dispute while you’re still employed.

An offer of a settlement agreement doesn’t mean you’ve done anything wrong. Employers use them because they give certainty: both sides know where they stand, and nobody spends months on a dispute.

Why your employer pays for advice

For a settlement agreement to stop you bringing most employment claims, the law requires you to have had advice from an independent adviser, such as a solicitor, on its terms and effect. The adviser signs a certificate that is attached to the agreement.

Because the agreement only works if you’ve had that advice, most employers offer a contribution towards your legal fees. It’s usually written into the agreement itself, often as “up to £500 plus VAT”.

If the contribution covers the adviser’s fee, the advice costs you nothing, and you can choose your own adviser.

The money

Check that the agreement spells out each payment separately. Typically you’ll see some or all of these:

• Salary up to your leaving date, paid as normal.
• Notice pay, or a payment in lieu of notice if you won’t work your notice.
• Accrued holiday pay for holiday you’ve built up but not taken.
• Redundancy pay, if your role is redundant.
• A compensation payment: the extra sum for settling any claims.

Some of these are things you’d be owed anyway. It’s worth checking how much of the total is genuinely extra.

Tax

Different payments are taxed differently. As a general rule, salary, notice pay and holiday pay are taxed in the usual way. A genuine compensation payment for losing your job can often be paid free of tax up to £30,000, but there are exceptions, and the agreement should say how each payment will be treated.

Most agreements also say that if HMRC later decides more tax was due, you’ll pay it. That’s one reason the tax treatment should be checked before you sign, not after.

The claims you give up

The agreement will list the claims you’re waiving. It usually includes claims like unfair dismissal, discrimination and breach of contract, whether or not you were thinking of bringing them.

Some rights can’t be signed away, such as claims for personal injury you don’t yet know about, or accrued pension rights. A good adviser will check that what you’re giving up is reasonable for what you’re being paid.

References and confidentiality

The clauses that matter most to people a year later are often not about money at all:

1. The reference. Ask for the wording to be agreed and attached to the agreement.
2. The announcement. How will your colleagues and clients be told you’re leaving?
3. Confidentiality. These clauses can’t stop you reporting wrongdoing, or talking to the police, a regulator or your doctor.
4. Restrictive covenants. Check whether any non-compete restrictions from your contract still apply.

Can you negotiate?

Often, yes. The first offer is not always the final one. Whether it’s worth negotiating depends on the strength of any claims you’d be giving up, your length of service and what your employer would gain from settling.

Negotiation is usually done “without prejudice”, meaning the conversations can’t normally be used as evidence later if talks fail. That gives both sides room to be frank.

What happens next

If you’ve been sent an agreement, a sensible order is:

1. Don’t sign anything, and don’t resign.
2. Note the deadline. If it’s tight, it’s reasonable to ask for more time to take advice.
3. Send the agreement, your contract and recent payslips to an adviser.
4. Talk it through, decide what (if anything) to ask for, and sign once you’re happy.

If you’d like me to review yours, my fixed fee is £450 plus VAT, usually paid by your employer. Book a settlement agreement appointment or use the fee estimator first.