Settlement Agreement Solicitors in Wakefield advising a client

Settlement Agreements: The Complete Guide for Employees

Last updated 25 June 2026
This guide has been reviewed by our employment law team to reflect current UK law and practice relating to settlement agreements. We update this page regularly to ensure the information remains accurate, practical and relevant for employees considering a settlement agreement.

If you’ve been offered a settlement agreement, it’s important to understand your rights before deciding whether to sign. You may be wondering whether the compensation is fair, whether you can negotiate a better deal, or what legal claims you would be giving up by accepting the offer.

This comprehensive guide explains everything you need to know about settlement agreements in the UK, including how they work, when they become legally binding, whether they can be negotiated, how compensation is calculated, who pays the legal fees and the common mistakes employees should avoid. Whether you’re facing redundancy, a workplace dispute or a negotiated exit from your employer, our aim is to provide clear, practical guidance to help you make an informed decision with confidence.

Key Takeaways

  • A settlement agreement is a legally binding contract between an employer and an employee that usually brings the employment relationship to an agreed end.
  • You are not obliged to sign a settlement agreement simply because it has been offered to you.
  • Most settlement agreements can be negotiated, including the compensation, legal fees, employment reference and other key terms.
  • Independent legal advice is normally required before a settlement agreement can validly waive your statutory employment rights.
  • Employers often contribute towards or fully cover the cost of legal advice, meaning many employees pay little or nothing for a solicitor’s assistance.
  • Once signed, a settlement agreement is usually final, and you will generally be unable to bring the employment claims that you have agreed to settle.
  • Taking advice before signing can help you understand your rights, identify potential risks and, where appropriate, negotiate a better outcome.

Table of Contents

What Is a Settlement Agreement?

A settlement agreement is a legally binding contract between an employer and an employee. It is used to bring an employment relationship or workplace dispute to an agreed conclusion, usually in exchange for a financial payment or other agreed terms.

In most cases, the employee agrees not to bring certain legal claims against their employer, while the employer agrees to provide compensation or other benefits that the employee would not otherwise receive.

Why Do Employers Use Settlement Agreements?

Employers use settlement agreements for many different reasons. They are often offered where an employer wishes to end the employment relationship on agreed terms without the time, cost and uncertainty of formal legal proceedings.

For example, a settlement agreement may be proposed during a redundancy exercise, following a workplace dispute, after disciplinary or performance concerns, or where both parties simply wish to part ways amicably.

For employees, a settlement agreement can provide certainty, financial compensation and a clean break. For employers, it can reduce the risk of future legal claims and avoid lengthy Employment Tribunal proceedings.

When Does a Settlement Agreement Become Legally Binding?

In the UK, a settlement agreement only becomes legally binding once certain legal requirements have been met. One of the most important requirements is that the employee must receive advice from an independent legal adviser, such as a qualified employment solicitor, on the terms and effect of the agreement.

Once the agreement has been properly signed and the legal formalities completed, it will usually be final and enforceable. This means that an employee will generally be unable to pursue the claims they have agreed to settle, making it essential to understand the agreement fully before signing.

Why Would an Employer Offer a Settlement Agreement?

Many employees are surprised to receive a settlement agreement and immediately assume they have done something wrong. In reality, that is often not the case.

Settlement agreements are commonly used as a practical way to end an employment relationship on agreed terms, allowing both the employer and employee to move forward without the uncertainty of formal disputes or Employment Tribunal proceedings.

Redundancy

One of the most common reasons for a settlement agreement is redundancy. An employer may offer an enhanced financial package in exchange for the employee agreeing not to bring legal claims relating to their employment or its termination.

In many cases, the settlement payment exceeds the employee’s minimum statutory entitlement, making it worthwhile for both parties to reach an agreement.

Performance Concerns

Where an employer has concerns about an employee’s performance, they may decide that a negotiated exit is preferable to embarking on a lengthy performance management process.

Rather than placing the employee through formal capability procedures, the employer may offer a financial package to achieve a mutually agreed departure.

Relationship Breakdown

Sometimes the working relationship between an employer and employee simply deteriorates to the point where continuing employment is no longer in either party’s best interests.

This may arise following disagreements with management, workplace conflict or a loss of trust and confidence. A settlement agreement can provide a clean and dignified way for both sides to part company.

Business Reorganisation

Businesses regularly restructure their operations in response to changing commercial needs. This may involve departmental changes, office closures, mergers or the removal of certain roles.

In these circumstances, employers may use settlement agreements to facilitate an agreed exit and provide greater certainty for everyone involved.

Avoiding Employment Tribunal Proceedings

Employment Tribunal litigation can be expensive, time-consuming and unpredictable for both employers and employees.

By entering into a settlement agreement, both parties can avoid the stress and cost of legal proceedings and instead reach a negotiated outcome that reflects their respective interests.

It is important to remember that being offered a settlement agreement does not necessarily mean your employer has acted lawfully or that the amount being offered is fair. Before signing, you should always seek independent legal advice to understand your rights and consider whether the terms could be improved.

Should You Sign a Settlement Agreement?

Whether you should sign a settlement agreement depends entirely on your individual circumstances. There is no one-size-fits-all answer, and accepting the first offer without understanding its implications could mean giving up valuable legal rights.

Before making a decision, it is important to consider both the financial package being offered and the strength of any potential legal claims you may have against your employer.

Never Feel Pressured to Sign Immediately

It is common for employees to feel under pressure when presented with a settlement agreement, particularly if they are told that the offer is “time limited” or that they need to make a quick decision.

In most cases, however, there is no benefit to rushing. Once signed, a settlement agreement is usually final and legally binding. You will generally be unable to pursue the employment claims that you have agreed to waive, even if you later regret your decision.

Taking the time to understand the agreement and obtain specialist advice can help you make an informed decision and avoid costly mistakes.

The Importance of Independent Legal Advice

For a settlement agreement to validly waive most statutory employment claims, the employee must receive advice from an independent legal adviser, such as an employment solicitor.

That advice is not simply a formality. A solicitor should explain:

  • What rights you are giving up.
  • Whether the financial package appears reasonable.
  • Any unusual or onerous clauses within the agreement.
  • Whether there may be scope to negotiate improved terms.

In many cases, employers contribute towards or fully cover the employee’s legal fees, meaning you can obtain specialist advice at little or no personal cost.

Balancing Certainty Against Potential Legal Claims

One of the key questions is whether the certainty of accepting the settlement outweighs the potential value of pursuing legal action.

For example, accepting a settlement agreement may provide:

  • Immediate financial compensation.
  • A guaranteed outcome.
  • A quicker and less stressful resolution.
  • An agreed reference or other favourable terms.

On the other hand, if you have strong claims for unfair dismissal, discrimination, whistleblowing or another employment issue, it may be appropriate to negotiate a better offer or, in some circumstances, decline the agreement altogether.

Every case is different. The right decision depends on your personal circumstances, the strength of your legal position and your future career plans. Before signing any settlement agreement, it is sensible to ensure you fully understand the terms and have considered whether they are truly in your best interests.

What Happens If You Refuse to Sign a Settlement Agreement?

Many employees worry that refusing to sign a settlement agreement will automatically result in dismissal or the withdrawal of all offers. In reality, the outcome depends on the circumstances of your case and your employer’s reasons for proposing the agreement.

Importantly, you are under no obligation to sign a settlement agreement simply because it has been offered to you.

Your Employer May Be Willing to Negotiate

In many cases, the first draft of a settlement agreement is not the employer’s best or final offer. It may be possible to negotiate:

  • A higher compensation payment.
  • A contribution towards additional legal fees.
  • A more favourable employment reference.
  • Changes to confidentiality provisions.
  • Amendments to restrictive covenants or other contractual terms.
  • The wording of any internal or external announcements.

Whether an employer is prepared to negotiate will depend on the strength of your legal position and their desire to reach an agreement.

Your Employer May Continue Formal Processes

If you decide not to sign, your employer may simply continue with the process that was already underway.

For example, they may proceed with:

  • A redundancy consultation.
  • A disciplinary investigation or hearing.
  • A performance or capability procedure.
  • A grievance process.
  • Other internal management procedures.

Refusing to sign a settlement agreement does not prevent your employer from taking lawful action or making legitimate business decisions.

The Employer May Withdraw the Offer

Settlement agreements are voluntary arrangements. If you reject the offer or seek changes that the employer is unwilling to accept, they may decide to withdraw it altogether.

This could mean losing the opportunity to receive the compensation package that was originally proposed. Equally, the employer may return with an improved offer if they remain keen to resolve matters without formal proceedings.

Carefully Consider Your Options Before Deciding

The decision whether to accept or reject a settlement agreement should not be taken lightly. You should consider:

  • The amount of compensation being offered.
  • The strength of any potential legal claims.
  • The likelihood of negotiating better terms.
  • The risks and costs of pursuing an Employment Tribunal claim.
  • Your future employment and financial circumstances.

Every situation is different. Before rejecting a settlement agreement, it is sensible to obtain independent legal advice so that you fully understand your rights and the possible consequences of your decision.

Can You Negotiate a Settlement Agreement?

Yes. In many cases, a settlement agreement is fully negotiable. Employers often expect some discussion before an agreement is finalised, particularly where the employee has valuable legal claims or where certain terms could be improved.

Many employees mistakenly believe they must either accept or reject the agreement as presented. In reality, there may be scope to negotiate both the financial package and the wording of the agreement itself.

Example: Emma is offered a settlement agreement with £10,000 compensation and a basic reference. After taking independent legal advice, she negotiates an increased payment of £14,000, a higher contribution towards her legal fees and an agreed reference confirming her positive performance. This demonstrates that the first offer is not always the employer’s best or final offer.

Compensation

The amount of compensation offered is often one of the first areas considered during negotiations. Depending on the circumstances, it may be possible to negotiate a higher payment, particularly where the employee has potential legal claims or the employer is keen to achieve a swift and amicable resolution.

Factors such as length of service, seniority, future loss of earnings and the strength of any Employment Tribunal claims may all influence negotiations.

Notice Pay

You should check whether you are receiving the correct notice entitlement under your contract of employment or by law. In some cases, employers are willing to improve notice arrangements or make additional payments as part of a negotiated exit package.

Holiday Pay

Any accrued but untaken annual leave should be considered carefully. It is important to ensure that your holiday entitlement has been calculated correctly and that any payment due is accurately reflected in the agreement.

Bonuses and Commission

If you are entitled to a discretionary or contractual bonus, commission payment or other incentive, this should not be overlooked. Depending on the circumstances, it may be possible to negotiate for these payments to be included as part of the settlement.

Employment Reference

A favourable employment reference can be just as valuable as additional compensation, particularly if you are seeking a new role.
Rather than leaving matters to chance, many settlement agreements include an agreed reference setting out exactly what the employer will provide to future prospective employers.

Restrictive Covenants

Some employees remain subject to post-termination restrictions, such as non-compete or non-solicitation clauses contained within their contract of employment.

Where appropriate, these restrictions may be capable of negotiation as part of the settlement process, potentially allowing greater flexibility when moving to a new employer or starting a business.

Internal and External Announcements

The way your departure is communicated can also be important. It may be possible to agree the wording of announcements made to colleagues, clients or third parties, helping to protect your professional reputation and avoid misunderstand.

Legal Fees

Many employers agree to contribute towards, or fully pay, the employee’s legal fees for obtaining independent advice on the settlement agreement.

If the proposed contribution is insufficient, it may be possible to negotiate a higher amount, particularly where the agreement is lengthy or complex.

Every Settlement Agreement Is Different

The extent to which an employer is willing to negotiate will depend on the individual circumstances of the case. However, it is often possible to improve one or more aspects of the agreement before signing.

An experienced employment solicitor can identify opportunities for negotiation, advise whether the proposed terms are reasonable and, where appropriate, negotiate on your behalf to help secure the best possible outcome.

How Much Compensation Should You Receive?

One of the most common questions employees ask is: “How much should I receive under a settlement agreement?”

Unfortunately, there is no simple answer. Unlike statutory redundancy pay or notice pay, there is no fixed formula for calculating settlement agreement compensation. The amount offered will depend on a range of legal, financial and commercial factors unique to your situation.

There Is No Standard Formula

Some employers offer only a modest ex gratia payment, while others may propose several months’ salary or significantly more. Two employees in similar roles can receive very different offers depending on the circumstances.

As a result, it is important not to assume that the first offer is fair simply because it has been made by your employer.

Example: James has worked for his employer for 12 years and is offered three months’ salary under a settlement agreement following a workplace dispute. After reviewing the circumstances, his solicitor identifies potential claims and negotiates an improved package equivalent to six months’ salary. By contrast, a colleague with only one year’s service and no apparent legal claims may reasonably receive a much lower offer. Every case turns on its own facts.

The Strength of Your Potential Legal Claims

Perhaps the most significant factor influencing compensation is the strength of any legal claims you may have.

For example, if you may have claims for unfair dismissal, discrimination, whistleblowing, breach of contract or another employment-related matter, your employer may be prepared to offer a higher settlement to reduce the risk and cost of defending those claims.

Conversely, where an employee has few or no viable legal claims, the employer may have less incentive to increase its offer.

Your Length of Service

Employees with longer service often receive higher settlement offers, particularly where they have built up greater employment rights or where their departure could expose the employer to more substantial legal claims.

Length of service may also affect statutory entitlements, contractual notice periods and redundancy payments, all of which should be considered when evaluating an offer.

Seniority and Remuneration

An employee’s position within the organisation can also have a significant impact on settlement negotiations.

Senior employees may have more valuable contractual benefits, longer notice periods, larger bonus arrangements or more complex incentive packages. They may also face greater difficulty securing comparable employment, all of which can influence the level of compensation that is considered appropriate.

Future Loss of Earnings

Another important consideration is how long it is likely to take you to secure alternative employment.

If your prospects of finding a similar role are limited, or you expect to suffer a prolonged period of lost income, this may strengthen the case for negotiating a higher settlement payment. Equally, where you have already secured another position or expect to do so quickly, this may reduce the value of any potential claim.

Every Case Should Be Assessed on Its Own Merits

Settlement agreements are highly fact-specific. A fair offer for one employee may be wholly inadequate for another.

Before deciding whether to accept a settlement package, it is sensible to consider not only the headline figure but also the overall value of the agreement, including notice pay, accrued holiday pay, bonuses, benefits, pension contributions and any agreed reference.

Obtaining independent legal advice can help you understand whether the offer reflects your legal position and whether there may be scope to negotiate a better outcome.

Who Pays the Legal Fees?

In the vast majority of settlement agreement cases, the employer pays some or all of the employee’s legal fees for obtaining independent legal advice.

This is because, for most statutory employment claims to be validly waived, the employee must receive advice from an independent legal adviser, such as an employment solicitor. As a result, it is common practice for employers to make a financial contribution towards those costs.

Employer Contributions Are Usually Included

Most settlement agreements contain a clause stating that the employer will pay a specified sum towards the employee’s legal fees. This payment is typically made directly to the employee’s solicitor once the agreement has been completed.

The amount offered varies depending on the employer and the complexity of the matter, but contributions commonly range from £350 to £1,000 plus VAT. In some straightforward cases, this may be sufficient to cover the legal fees in full.

What If the Contribution Is Not Enough?

If the employer’s contribution does not fully cover the cost of the legal advice required, there may be several options available.

Depending on the circumstances, your solicitor may:

  • Agree to act within the employer’s contribution where appropriate.
  • Ask you to pay any shortfall.
  • Seek to negotiate an increased contribution from your employer as part of the settlement discussions.

Whether additional fees are payable will depend on the complexity of the agreement and the terms agreed between you and your solicitor.

Check the Position Before Instructing a Solicitor

Although employer-funded legal advice is common, it should never be assumed. Some employers cap their contribution, while others make payment conditional on the agreement being signed.


Before instructing a solicitor, it is sensible to confirm:

  • Whether your employer has agreed to contribute towards your legal fees.
  • The maximum amount they are prepared to pay.
  • Whether any conditions apply to that contribution.
  • Whether you may be personally responsible for any costs above the agreed contribution.

A specialist employment solicitor can advise you on these issues at the outset and, where appropriate, seek to negotiate a higher contribution from your employer.

Are Settlement Payments Tax-Free?

Many employees believe that all settlement agreement payments are tax-free. Unfortunately, this is a common misconception.

The tax treatment of a settlement payment depends on what the payment represents. Some elements may be paid free of income tax (up to certain limits), while others must be subject to PAYE and National Insurance deductions in the usual way.

The £30,000 Tax Exemption

In many cases, compensation paid for the termination of employment can be paid tax-free up to £30,000.

This exemption typically applies to genuine ex gratia compensation payments made because the employee’s employment is ending. However, not every payment in a settlement agreement qualifies for this treatment, and the rules can be complex.

If the tax-free element exceeds £30,000, the excess will generally be subject to income tax.

Notice Pay

Payments representing notice pay are usually taxable.

Whether your employer pays you for working your notice period or makes a payment in lieu of notice (often referred to as a PILON), these sums are generally treated as earnings and are therefore subject to income tax and National Insurance contributions.

Holiday Pay

Any payment for accrued but untaken holiday entitlement is also normally taxable.

As with salary, holiday pay is treated as earnings and will usually be processed through payroll with the appropriate deductions applied.

Bonuses and Commission

Contractual bonuses, commission payments and similar remuneration are generally subject to tax and National Insurance.

If these amounts are included within a settlement agreement, they will usually be paid in the same way as normal employment income rather than benefiting from the £30,000 tax exemption.

The Tax Treatment Depends on the Nature of the Payment

A settlement agreement often contains several different types of payment, each of which may be taxed differently. For example:

  • Compensation for loss of employment may qualify for the £30,000 tax exemption.
  • Notice pay is usually taxable.
  • Holiday pay is usually taxable.
  • Salary arrears are usually taxable.
  • Bonuses and commission are usually taxable.
  • Employer pension contributions may be treated differently depending on how they are structured.

For this reason, it is important to look beyond the total figure and understand how each component of the settlement package will be treated for tax purposes.

Seek Advice if You Are Unsure

Tax is only one factor to consider when assessing a settlement agreement, but it can have a significant impact on the amount you ultimately receive.

A specialist employment solicitor can explain how the payments in your agreement are structured and identify any issues that may require further advice. Where appropriate, you should also seek independent tax advice in relation to your individual circumstances.

Confidentiality Clauses Explained

Most settlement agreements contain a confidentiality clause. These provisions are designed to keep certain information private and can be an important part of the agreement for both the employer and the employee.

However, confidentiality clauses vary considerably from one agreement to another, so it is important to understand exactly what you are agreeing to before signing.

Keeping the Terms of the Agreement Private

A confidentiality clause will often require you to keep some or all of the following confidential:

  • The fact that a settlement agreement has been entered into.
  • The amount of compensation being paid.
  • The terms of the agreement.
  • The circumstances leading to your departure from the business.
  • Information about the employer’s business or internal affairs.

In many cases, the employer will agree to be bound by similar obligations.

Who Can You Tell?

Although confidentiality clauses can appear strict, they almost always contain exceptions allowing disclosure in certain situations.

For example, you will usually be permitted to discuss the agreement with:

  • Your solicitor or other professional adviser.
  • Your spouse, civil partner or immediate family members.
  • HM Revenue & Customs, where necessary.
  • Your accountant or tax adviser.
  • A court, tribunal or regulatory body where disclosure is legally required.

The exact wording varies from agreement to agreement, so it is important to check the permitted disclosures carefully.

Confidentiality Does Not Prevent Whistleblowing

Settlement agreements cannot lawfully prevent an individual from making a protected disclosure or reporting unlawful conduct.

In most cases, confidentiality clauses expressly preserve the employee’s right to:

  • Report criminal activity to the police.
  • Make a protected disclosure under whistleblowing legislation.
  • Cooperate with regulators or law enforcement agencies.
  • Comply with legal obligations or court orders.

If an agreement appears to prevent these types of disclosure altogether, you should seek legal advice before signing.

Practical Implications

For many employees, confidentiality clauses are not problematic and simply reflect a mutual desire to keep matters private.

However, they can have practical consequences. For example, you may need to avoid discussing the settlement amount with former colleagues or posting details about your departure on social media.

If the wording is too restrictive or unclear, it may be possible to negotiate amendments before the agreement is signed. An employment solicitor can explain what the clause means in practice and advise whether any changes should be requested.

In most cases, complying with a confidentiality clause is straightforward, but you should always ensure you understand its scope and any exceptions before agreeing to be bound by it.

Restrictive Covenants and Future Employment

If you are leaving your employment under a settlement agreement, it is important to consider whether you remain bound by any restrictive covenants in your contract of employment.

Many employees assume that signing a settlement agreement automatically releases them from these obligations. In reality, the opposite is often true. Most settlement agreements expressly preserve existing post-termination restrictions unless they are specifically varied or removed.

Non-Compete Clauses

A non-compete clause seeks to prevent an employee from working for, or establishing, a competing business for a specified period after leaving their employment.

Whether such a clause is enforceable will depend on its wording and the circumstances of the case. In general, a restriction must go no further than is reasonably necessary to protect the employer’s legitimate business interests.

If you are planning to join a competitor or start your own business, you should obtain legal advice before accepting that the restriction applies.

Non-Solicitation and Non-Dealing Clauses

Many employment contracts also contain provisions preventing former employees from:

  • Approaching or attempting to win business from former clients or customers.
  • Encouraging colleagues to leave the business.
  • Dealing with certain customers for a specified period after termination.


These restrictions can have a significant impact on your future employment plans, particularly if you work in a client-facing or senior role.

Existing Contractual Restrictions May Continue to Apply

Even if your settlement agreement does not contain any new restrictive covenants, it may state that the restrictions contained in your original contract of employment continue in full force and effect.

For this reason, it is essential to review both documents together. Simply signing a settlement agreement does not necessarily remove obligations that already exist under your employment contract.

Can Restrictive Covenants Be Negotiated?

Yes. In some cases, it is possible to negotiate changes as part of the settlement process.

Depending on the circumstances, your employer may agree to:

  • Remove certain restrictions altogether.
  • Shorten the duration of a restriction.
  • Limit the geographical scope of a clause.
  • Narrow the categories of customers or employees covered.
  • Confirm in writing that particular activities will not breach the restrictions.

If your future career plans could be affected by restrictive covenants, it is sensible to address the issue before signing the settlement agreement rather than afterwards.

Review the Restrictions Carefully Before Signing

Restrictive covenants can have lasting consequences long after your employment has ended. Before entering into a settlement agreement, you should ensure you understand any ongoing obligations and consider whether they are reasonable and appropriate in your circumstances.

An experienced employment solicitor can review your contract and settlement agreement together, explain how the restrictions may affect your future employment and, where appropriate, negotiate amendments on your behalf.

References

If you are leaving your employment under a settlement agreement, one important issue to consider is what reference your employer will provide to future employers.

A well-drafted reference can help protect your professional reputation and improve your prospects of securing new employment. It is therefore often worth discussing this point before signing the agreement.

Agreed References

Many settlement agreements include an agreed reference as a schedule or appendix to the document.

This means that both parties have approved the wording in advance, giving you certainty about what will be said if a prospective employer requests a reference in the future.

An agreed reference may simply confirm your job title and dates of employment, or it may include additional positive comments about your performance, conduct or contributions to the business.

Basic References

Some employers have a policy of providing only a basic factual reference. This typically confirms:

  • Your job title.
  • Your dates of employment.
  • In some cases, your final salary.

Such references are common and should not automatically be viewed as a negative reflection on your employment. Many organisations adopt this approach for all departing employees to reduce the risk of disputes.

Why the Wording Matters

The precise wording of a reference can make a significant difference when applying for a new role.

For example, you may wish to ensure that:

  • The reference accurately reflects your position and responsibilities.
  • It confirms that your departure was by mutual agreement where appropriate.
  • It does not contain misleading or ambiguous language.
  • It is consistent with any announcements made about your departure.

Where a settlement agreement includes an agreed reference, the employer will usually be expected to provide that reference if requested by a future employer.

Can You Negotiate Your Reference?

Yes. References are often negotiable and can form an important part of settlement discussions.

If a positive reference is important to your future career, it may be possible to agree wording that better reflects your achievements or provides additional reassurance to prospective employers.

Before signing a settlement agreement, it is sensible to review any proposed reference carefully. An employment solicitor can advise whether the wording is appropriate and, where necessary, seek amendments to protect your future employment prospects.

Bonuses, Shares and Other Benefits

When reviewing a settlement agreement, it is important to look beyond the headline compensation figure. Many employees have valuable contractual rights or workplace benefits that may be affected by the termination of their employment.

Understanding what you are entitled to can make a significant difference to the overall value of your settlement package.

Bonuses

If you are eligible for an annual bonus, performance bonus or discretionary payment, you should consider whether you are entitled to receive it despite your employment ending.

The answer will depend on the wording of your contract, any bonus scheme rules and the timing of your departure. In some cases, it may be possible to negotiate a bonus payment as part of the settlement agreement.

Commission

Employees who earn commission should ensure that any outstanding commission has been properly calculated.

You may have accrued commission on sales or work completed before your employment ends, and this should not be overlooked during settlement negotiations. Depending on the circumstances, future or pipeline commission may also be a point for discussion.

Share Options and Long-Term Incentive Plans (LTIPs)

If you participate in a share scheme, share option plan or long-term incentive plan (LTIP), leaving your employment may affect your rights significantly.

Some schemes provide for immediate forfeiture upon termination, while others allow vested awards to be retained or exercised within a specified period. The relevant scheme rules should be reviewed carefully to understand the financial implications of accepting a settlement agreement.

Company Cars and Other Company Property

If you have the use of a company car or other employment-related benefits, your settlement agreement may specify when these must be returned and whether any payments will be made in lieu of the benefit.

It is also worth checking arrangements relating to fuel cards, mobile phones, laptops and other equipment provided by your employer.

Private Medical Insurance and Other Benefits

Many employees receive benefits in addition to their salary, such as private medical insurance, life assurance, income protection, gym memberships or other flexible benefits.

These benefits often cease when employment ends unless the settlement agreement provides otherwise. In some cases, employers may agree to continue certain benefits for a period after termination or reflect their value in the financial package.

Pension Contributions

Your pension arrangements should also be considered carefully.

Depending on the terms of the agreement, your employer may continue making pension contributions during your notice period or include a separate payment to reflect lost contributions. The position will depend on your contract of employment, the pension scheme rules and the negotiated terms of the settlement.

Review the Entire Package, Not Just the Compensation Figure

A settlement agreement should be assessed as a whole. An offer that appears attractive at first glance may be less favourable once bonuses, commission, share rights or valuable benefits are taken into account.

Before signing, it is sensible to ensure that all contractual entitlements have been properly considered and that you understand how your departure will affect your wider remuneration package. An experienced employment solicitor can help identify issues that might otherwise be overlooked and, where appropriate, negotiate improvements on your behalf.

Holiday Pay and Notice Pay

When considering a settlement agreement, it is important to understand what you are entitled to receive in respect of holiday pay and notice pay. These payments can make up a significant proportion of your overall package and should be checked carefully before you sign.

Outstanding Holiday Pay

If you have accrued annual leave that you have not taken by the time your employment ends, you will usually be entitled to be paid for it.

Your settlement agreement should clearly set out:

  • The amount of accrued but untaken holiday.
  • How it has been calculated.
  • When it will be paid.

Equally, if you have taken more holiday than you have accrued, your employer may seek to make a deduction from your final salary where permitted by your contract.

Before signing, it is worth checking that the holiday calculation is accurate and reflects your contractual entitlement.

Payment in Lieu of Notice (PILON)

Many settlement agreements provide for a Payment in Lieu of Notice, commonly referred to as PILON.

Instead of requiring you to work your notice period, your employer pays you the salary (and sometimes other contractual entitlements) that you would have received had you remained employed during that period.

The amount payable will depend on your contract of employment and the terms of the settlement agreement. It is important to ensure that the notice period has been calculated correctly and that all contractual entitlements have been taken into account.

Garden Leave

In some cases, an employer may place an employee on garden leave rather than making a PILON.

During garden leave, you remain employed and continue to receive your salary and contractual benefits, but you are not required to attend work or carry out your usual duties. You will normally remain bound by your contractual obligations until your employment formally ends.

Whether you are placed on garden leave or receive a PILON can have practical implications, particularly if you are hoping to start a new role with another employer.

Benefits During Your Notice Period

If you are working your notice or are placed on garden leave, you may continue to receive benefits such as:

  • Pension contributions.
  • Private medical insurance.
  • Company car or car allowance.
  • Life assurance.
  • Other contractual benefits provided under your employment package.

However, where a PILON is made and your employment terminates immediately, these benefits may cease unless the settlement agreement expressly provides otherwise.

Review These Payments Carefully

Holiday pay and notice pay are often straightforward, but mistakes do occur. Before signing a settlement agreement, you should ensure that:

  • Your notice entitlement has been correctly identified.
  • Any PILON has been accurately calculated.
  • Outstanding holiday pay is correct.
  • You understand what will happen to your contractual benefits.

Reviewing these issues at an early stage can help ensure that you receive everything you are entitled to under your contract and the settlement agreement.

How Long Do You Have to Consider a Settlement Agreement?

If you have been presented with a settlement agreement, it is natural to wonder how long you have to make a decision. While there is no fixed statutory cooling-off period, employers should give employees a reasonable opportunity to consider the offer and obtain independent legal advice before deciding whether to sign.

Rushing into a decision can have significant consequences, particularly as settlement agreements are usually final and legally binding once completed.

ACAS Guidance

The ACAS Code of Practice on Settlement Agreements recommends that employees should generally be given at least 10 calendar days to consider the written terms of a settlement agreement and obtain independent advice.

This is guidance rather than a strict legal requirement, and there may be circumstances where a shorter or longer period is appropriate. However, many employers choose to follow the ACAS recommendation as good practice.

What If Your Employer Is Pressuring You?

Some employers impose tight deadlines or suggest that an offer will expire unless it is accepted immediately.

While there may be legitimate commercial reasons for wanting a prompt response, you should be cautious about signing under pressure. A short deadline does not necessarily mean that the offer cannot be extended or negotiated.

If you feel rushed, you may wish to explain that you need sufficient time to obtain legal advice and properly consider the terms. In many cases, employers will agree to a reasonable extension.

Take Proper Legal Advice Before Signing

A settlement agreement can affect your legal rights, future employment prospects and financial position. Once signed, you will usually be unable to pursue the claims you have agreed to settle.

Before making a decision, you should ensure that you:

  • Understand the compensation being offered.
  • Know which legal claims you are giving up.
  • Review any confidentiality or restrictive covenant provisions.
  • Check that notice pay, holiday pay and other entitlements have been correctly calculated.
  • Consider whether there is scope to negotiate improved terms.

Taking specialist legal advice does not mean you are rejecting the offer or making the process more difficult. On the contrary, it helps ensure that you make an informed decision and avoid agreeing to terms that may not be in your best interests.

In many cases, employers contribute towards or fully cover the cost of that legal advice, making it sensible to obtain professional guidance before signing.

Common Mistakes Employees Make

Being offered a settlement agreement can be stressful, particularly if it comes as a surprise. In those circumstances, it is easy to make decisions that may have long-term financial or legal consequences.

Below are some of the most common mistakes employees make when considering a settlement agreement.

Signing Too Quickly

Perhaps the biggest mistake is signing the agreement without fully understanding its terms.

Once a settlement agreement has been properly executed, it is usually final and legally binding. In most cases, you will be unable to pursue the legal claims that you have agreed to waive, even if you later discover that the compensation was inadequate or certain provisions are unfavourable.

Take the time to read the agreement carefully and obtain independent legal advice before making a decision.

Assuming the First Offer Is Final

Many employees assume that the amount initially offered by their employer is non-negotiable. That is not always the case.

Settlement agreements are often the starting point for discussions, and employers may be willing to improve the financial package or amend other terms to achieve an agreed resolution.

Depending on the circumstances, it may be possible to negotiate:

  • Increased compensation.
  • A higher legal fee contribution.
  • A better employment reference.
  • Changes to restrictive covenants or confidentiality clauses.
  • Amendments to other contractual provisions.

Ignoring the Tax Implications

The total figure quoted in a settlement agreement does not necessarily represent the amount you will receive in your bank account.

Different elements of the package may be treated differently for tax purposes. For example, compensation for loss of employment, notice pay, holiday pay and bonuses may each have their own tax treatment.

Understanding how the payments are structured can help you assess the true value of the offer.

Overlooking Restrictive Covenants

Many employees focus solely on the compensation figure and fail to consider whether they remain bound by post-termination restrictions in their employment contract.

Clauses restricting competition, solicitation of clients or dealings with former colleagues can affect your ability to move to a new employer or start your own business.

Before signing, it is sensible to review these provisions carefully and consider whether they should be negotiated.

Failing to Negotiate an Employment Reference

Your future career may depend not only on the financial settlement but also on the reference your employer provides.

Where appropriate, it may be possible to agree the wording of a reference in advance and include it within the settlement agreement. This can provide valuable certainty when applying for future roles and help avoid unnecessary disputes later.

Focusing Only on the Compensation Figure

A settlement agreement is about far more than the headline payment.

Notice pay, holiday pay, bonuses, pension contributions, share schemes, benefits, confidentiality obligations and ongoing contractual restrictions can all have a significant impact on the overall value of the agreement.

By considering the package as a whole and obtaining specialist legal advice, you can make an informed decision and maximise the likelihood of achieving the best possible outcome.

Frequently Asked Questions

Can I Change My Mind After Signing a Settlement Agreement?

In most cases, no. Once a settlement agreement has been properly signed by both parties and the legal requirements have been met, it becomes legally binding. This means you will usually be unable to withdraw from the agreement or pursue the employment claims that you have agreed to settle.

For that reason, it is essential to understand the terms fully and obtain independent legal advice before signing.

Generally, no. There is usually no obligation to disclose that you entered into a settlement agreement unless you are specifically asked or your profession requires such disclosure.

Many settlement agreements also contain confidentiality clauses that restrict what can be said about the circumstances of your departure. However, you should always answer questions from prospective employers honestly and in accordance with any legal or contractual obligations.

Possibly. Whether you are entitled to claim benefits will depend on your individual circumstances and the type of benefit you are applying for.

Receiving a settlement payment does not automatically prevent you from claiming state benefits, although the amount and nature of the payment may affect your entitlement. If you are concerned about this, you should seek advice based on your specific financial situation.

Refusing to sign a settlement agreement does not, by itself, give your employer the right to dismiss you.

However, your employer may continue with other lawful processes, such as redundancy consultations, disciplinary proceedings or capability procedures. They may also decide to withdraw the settlement offer altogether.

Every situation is different, so it is important to understand the reasons behind the offer and the options available to you before making a decision.

Yes. In many cases, settlement agreements are negotiable.

Depending on the circumstances, it may be possible to negotiate a higher compensation payment or improvements to other terms, such as notice pay, bonuses, references, legal fee contributions or restrictive covenants.

Whether an employer is prepared to negotiate will depend on factors including the strength of your potential legal claims and their desire to reach an agreement.

For a settlement agreement to validly waive most statutory employment claims, you must receive advice from an independent relevant adviser, such as a qualified employment solicitor.

A solicitor’s role is not simply to witness your signature. They should explain the legal effect of the agreement, identify any unusual or unfavourable provisions, answer your questions and advise whether there may be scope to negotiate better terms.

In many cases, your employer will contribute towards or fully cover the cost of obtaining this legal advice, meaning you can receive specialist assistance with little or no personal expense.

How We Approach Settlement Agreements at My Law Solicitors

At My Law Solicitors, settlement agreements are one of our core areas of practice. We understand that receiving an agreement from your employer can be daunting, particularly if you have never encountered one before.

Our role is not simply to witness your signature. We take the time to ensure that you understand the agreement, identify any potential issues and, where appropriate, help you achieve a better outcome.

1. We Review the Agreement Thoroughly

We begin by carefully reviewing the settlement agreement and any related documentation provided by your employer.

Our solicitors check the proposed financial package, the legal wording and any provisions that may affect your rights after your employment ends.

2. We Advise You on the Legal Effect

We explain, in straightforward language, what the agreement means and the legal rights you will be giving up by signing it.

This includes discussing the practical consequences of the agreement, rather than simply reading through the document clause by clause.

3. We Identify Any Risks or Unusual Terms

Not all settlement agreements are the same. We look for clauses that may place you at a disadvantage, such as restrictive confidentiality obligations, ongoing contractual restrictions or provisions that could affect your future employment.

Where we identify concerns, we explain them clearly so that you can make an informed decision.

4. We Recommend Improvements Where Appropriate

If we believe the agreement could be strengthened, we will discuss those recommendations with you.

Depending on your circumstances, this might include suggesting changes to the compensation package, employment reference, restrictive covenants, confidentiality wording or other contractual terms.

5. We Negotiate on Your Behalf

Where there is scope to improve the agreement and you wish us to do so, we can negotiate directly with your employer or their solicitors.

Our aim is to secure the best possible outcome while keeping the process as straightforward and constructive as possible.

6. We Explain Everything in Plain English

Legal documents can be complex, but our advice is not.

We explain settlement agreements in clear, practical language, answer your questions and ensure that you fully understand the implications before deciding whether to proceed.

7. We Complete the Process Once You Are Happy

Only when you are satisfied with the terms and have decided to proceed will we sign the independent adviser’s certificate and arrange for the agreement to be returned to your employer.

Our objective is simple: to give you confidence that you understand your settlement agreement and that it reflects the best outcome reasonably available in your circumstances.

Speak to a Specialist Settlement Agreement Solicitor

If you have been offered a settlement agreement, there is no need to navigate it alone. Obtaining specialist legal advice can help you understand your rights, identify potential risks and, where appropriate, negotiate a better outcome before you sign.

At My Law Solicitors, we advise employees across England and Wales on settlement agreements every week. Whether your employer has offered a straightforward exit package or a complex agreement involving bonuses, restrictive covenants or confidentiality clauses, our experienced team is here to help.

Our solicitors will:

  • Review your settlement agreement in detail.
  • Explain the legal effect in clear, practical language.
  • Answer any questions you may have.
  • Identify opportunities to improve the terms where appropriate.
  • Negotiate with your employer on your behalf if requested.
  • Ensure you are fully informed before deciding whether to sign.

In many cases, your employer will fully cover the cost of our legal fees, meaning you can receive expert advice with little or no personal expense.

Looking for Local Advice?

We support employees throughout the country and have dedicated pages for a number of locations, including:

If you cannot find your location, don’t worry. We regularly advise clients nationwide by telephone and video call, allowing us to provide the same high-quality service wherever you are based.

Contact My Law Solicitors Today

If you’ve received a settlement agreement or have been invited to a protected conversation, get in touch with our specialist team today.

We’ll help you understand your options, protect your interests and ensure you can make an informed decision with confidence.

Contact My Law Solicitors Today

If you’ve received a settlement agreement or have been invited to a protected conversation, get in touch with our specialist team today.

We’ll help you understand your options, protect your interests and ensure you can make an informed decision with confidence.

Contact Us Today:

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