Settlement agreement: what UK employees must check before signing
A settlement agreement — formerly called a compromise agreement — is a legally binding contract that ends your employment and, in exchange for a payment, waives your right to bring most claims against your employer in an employment tribunal.
Settlement agreements are serious documents. Once signed, you give up rights you might otherwise have exercised. Understanding what you are agreeing to before you sign is not optional — it is essential.
The independent legal advice requirement
Before a settlement agreement is legally binding, you must receive independent legal advice from a solicitor, trade union representative, or other qualified adviser. Your employer is typically required to contribute to the cost of this advice.
This requirement exists specifically because settlement agreements are significant. The law recognises that you need professional help to understand what you are signing away.
What you are giving up
The agreement will typically include a list of claims you are waiving — claims for unfair dismissal, wrongful dismissal, discrimination, harassment, breach of contract, and others. Read this list carefully.
Some agreements attempt to waive claims you did not even know you had, or claims that have not yet arisen. Personal injury claims are typically excluded, but check this explicitly.
The financial package
The agreement should clearly state what you are receiving in exchange for signing. This typically includes your notice period payment, any accrued but untaken holiday pay, and a severance payment.
The first £30,000 of a genuine ex-gratia payment is generally tax-free under UK law. Payments in lieu of notice (PILON) are taxable from 6 April 2018 regardless of what the agreement says, following changes to the tax treatment of termination payments.
Confidentiality and non-disparagement clauses
Most settlement agreements include confidentiality obligations preventing you from discussing the terms of the agreement or the circumstances of your departure. Some also include non-disparagement clauses preventing you from saying anything negative about your employer.
Check the scope of these clauses carefully. Can you discuss the situation with your spouse? With a new employer who asks why you left? Some confidentiality clauses are drafted so broadly they create practical problems.
References
If you are leaving under difficult circumstances, negotiating the wording of a reference before signing is valuable. Ask for a reference to be attached to the agreement or for the exact wording to be agreed.
Restrictive covenants
Settlement agreements sometimes include or confirm post-employment restrictions — non-compete clauses, non-solicitation clauses. Check whether these are new restrictions or confirmations of restrictions already in your employment contract, and whether they are reasonable.
Time to consider
You should be given reasonable time to consider the agreement — ACAS guidance suggests a minimum of ten calendar days. Do not be pressured into signing immediately.
Getting your settlement agreement reviewed
PaperSafe reviews settlement agreements in plain English, identifying what you are giving up, what you are receiving, and what the key clauses mean for your situation. Upload your PDF and receive a complete review in under 2 minutes for £49 — before you sign away your rights.
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