Settlement agreement — what you need to know before you sign
If your employer has offered you a settlement agreement, you've probably got a lot of questions and not much time. Here's what it means, what to look for and what your rights are.
What is a settlement agreement?
A settlement agreement (formerly called a compromise agreement) is a legally binding contract between you and your employer. In exchange for a payment, you agree to waive your right to bring certain employment tribunal claims. They're commonly used when employment is ending — whether through redundancy, dismissal or mutual agreement — but can also be used to resolve ongoing disputes.
You must get independent legal advice
This is not optional — it's a legal requirement. A settlement agreement is only valid if you have received independent legal advice on its terms and effects from a qualified adviser (usually a solicitor). Crucially, your employer must pay for this advice. They will usually offer a fixed contribution (typically £250–£500 + VAT). If their contribution doesn't cover the full cost of advice, ask them to increase it — most employers will.
What to check before signing
The financial settlement
- Is the payment fair given your circumstances? (Compare to what you might win at tribunal)
- How much is redundancy pay, how much is compensation, how much is notice pay? (Tax treatment differs)
- Is the first £30,000 of the settlement genuinely tax-free? (It should be if structured correctly)
The claims being waived
Read this section carefully with your solicitor. A standard agreement waives most employment claims. Watch for unusually broad waivers — particularly relating to pension rights or personal injury claims you may not be aware of yet.
Reference
Ask for an agreed reference to be attached to the settlement. Once signed, your employer's obligation to provide a reference may depend entirely on what's in the agreement.
Confidentiality clauses
Most agreements include a confidentiality clause preventing you from discussing the settlement. This is normal. What's less normal — and worth flagging — is an overly broad clause that prevents you from discussing general workplace issues with anyone.
Post-termination restrictions
Check for non-compete, non-solicitation or non-poaching clauses. These limit your ability to work in the same industry or contact former clients or colleagues. Restrictions that are too broad or long may be unenforceable — your solicitor can advise.
Should you sign?
This depends on your specific circumstances. Key questions to weigh up with your solicitor:
- Is the financial offer fair given the strength of any potential tribunal claim?
- How long would a tribunal claim take and what would it cost emotionally and practically?
- What are the restrictions on your future employment and are they acceptable?
- Is the reference adequate?