A settlement agreement is a legally binding contract that ends your employment on agreed terms, usually with a payment, in exchange for you giving up the right to bring claims against your employer. If one has landed on your desk, here is what you need to know before you sign.
Why your employer is paying for your solicitor
A settlement agreement is only binding if you have taken independent legal advice on it. That is a legal requirement, not a courtesy — which is why your employer will normally offer a contribution towards your legal costs. In many straightforward cases that contribution covers the advice entirely, so having it checked costs you nothing.
Is the offer actually fair?
That depends on what you are giving up. If you have a strong claim — for unfair dismissal, discrimination, or unpaid entitlements — the offer should reflect that. Employers often open with a figure below what the underlying claim is worth, expecting negotiation. Whether it is worth negotiating depends on the strength of your position, which is exactly what advice is for.
The parts people overlook
- Tax. Compensation for loss of employment is often tax free up to a threshold, but notice pay and holiday pay are taxable. The agreement usually makes you responsible for any tax due, so the structure matters.
- References. The wording of your reference can and should be agreed as part of the deal. Leaving it out is a common and avoidable mistake.
- Restrictive covenants. Check what the agreement says about where you can work next. Existing restrictions are sometimes tightened, or new ones introduced, in the small print.
- Confidentiality. Most agreements are confidential both ways. Make sure the obligation is mutual and that you can still speak to your family and advisers.
What if you don’t sign?
You are never obliged to. But be clear about what happens if you don’t — usually the offer is withdrawn and you are left with whatever claim you have. Sometimes that is a stronger position; sometimes it isn’t. We will tell you which.