A proposed exit package can look straightforward: a payment, a leaving date and a request to sign. Yet a settlement agreement review often reveals terms that affect far more than the final figure. Your ability to bring claims, speak about your employment, take a new role or rely on an agreed reference may all be covered by a legally binding document.
For employees, the priority is making an informed decision without feeling pressured by a deadline. For employers, a properly drafted and properly advised agreement provides greater certainty that a dispute has been resolved fairly and conclusively. In either case, careful legal review protects interests before the document is signed.
What is a settlement agreement?
A settlement agreement is a written contract under which an employee or worker usually agrees not to bring specified legal claims against their employer. In return, the employer offers compensation or other agreed terms, such as notice pay, an agreed reference, continued benefits for a period or a contribution to legal fees.
These agreements are commonly used when employment is ending, including after redundancy consultations, performance concerns, disciplinary issues, grievances or a wider workplace dispute. They can also resolve claims after employment has already ended.
The agreement must meet legal requirements to waive statutory employment claims validly. One of the key requirements is that the individual receives advice from an independent adviser, usually an employment solicitor. The adviser must be identified in the agreement and carry appropriate insurance. This is why employers commonly make a contribution towards the cost of legal advice.
Independent advice is not simply a formality. It is an opportunity to understand what you are giving up, whether the terms reflect the circumstances and whether changes should be requested.
What a settlement agreement review should cover
A useful review looks at the whole arrangement, not just the headline compensation payment. The right approach depends on the facts: a routine redundancy exit calls for different questions from an agreement offered after allegations of discrimination, whistleblowing detriment or unfair dismissal.
The claims being settled
The agreement should identify the claims that are being waived with sufficient clarity. This can include contractual claims and statutory claims, such as unfair dismissal, discrimination, unlawful deduction from wages, holiday pay and whistleblowing claims.
A broad list does not automatically mean the agreement is defective, but it must be considered carefully. You need to know whether there are potential claims that justify seeking improved terms. The value of a claim can depend on evidence, length of service, earnings, efforts to find new work and the remedies available at an employment tribunal.
It is also important to check that the document does not seek to prevent claims that cannot lawfully be waived, or interfere with protected reporting rights.
Payments, deductions and tax treatment
The agreement should separate each element of payment clearly. This may include salary up to the termination date, accrued but untaken holiday, notice pay, bonus or commission, an ex gratia termination payment and expenses.
Different payments can have different tax and National Insurance treatment. Salary, holiday pay and most payments in lieu of notice are normally subject to deductions. A qualifying termination payment may be paid tax free up to the relevant statutory threshold, but the position is fact-specific. Describing a payment as compensation does not by itself determine how it is taxed.
A settlement agreement review should also establish when payment will be made and whether it is conditional on the agreement becoming effective. If a sum is due over time, the document should state the dates, method of payment and what happens if payment is late.
Notice, garden leave and benefits
Check whether the employment ends immediately, after a notice period or following garden leave. This affects pay, benefits, pension contributions, bonus entitlement and practical arrangements such as company property and access to systems.
If there is a payment in lieu of notice, establish whether it matches the contractual entitlement and whether any benefits have been included. For senior employees and those with variable remuneration, the calculation can require close attention. Commission, share plans, private medical cover and car allowances can all create issues that are not addressed by a standard template.
References and public statements
A reference can matter as much as compensation where a new role is pending or future recruitment is likely. If a reference has been agreed, it should usually be attached to the agreement or set out in full. A vague promise to provide a reference may offer less protection than an agreed form of wording.
The agreement may also control what the parties say about the departure. Mutual non-derogatory wording can be appropriate, but it should not be so broad that it creates uncertainty about ordinary job-search discussions or legally required disclosures. Where an announcement is needed, agree who will communicate it and what will be said.
Confidentiality and permitted disclosures
Confidentiality clauses are common, particularly where the agreement concerns sensitive business information or workplace allegations. They should be specific and workable. You may need to speak to a spouse or partner, tax adviser, medical professional, insurer, prospective employer or regulatory body.
No agreement can lawfully prevent a protected disclosure, reporting a crime or cooperating with a regulator or law enforcement body. The wording should make appropriate exceptions clear. An overly broad confidentiality clause may cause unnecessary anxiety and should be addressed before signature.
Restrictive covenants and future work
Some agreements restate or strengthen post-termination restrictions, including non-compete, non-solicitation and non-dealing clauses. These can affect your next move, particularly if you work in a specialist sector, hold client relationships or are joining a competitor.
Do not assume that a restriction is harmless because a similar clause appeared in your employment contract. The settlement agreement may introduce new obligations, extend their duration or impose a financial consequence if breached. The review should identify exactly what is continuing and whether it is reasonable in your circumstances.
Is the offer fair?
There is no single formula for a fair settlement figure. An offer may be influenced by the strength of potential claims, likely tribunal compensation, contractual entitlements, the employer’s appetite for risk, the value of a clean exit and the practical impact of ongoing dispute.
A payment limited to statutory redundancy and notice may be appropriate where there is no realistic dispute and all contractual sums are being paid. It may be less appropriate where there are credible concerns about the process, discrimination, retaliation for whistleblowing or unpaid contractual benefits.
A review should be realistic as well as protective. Tribunal proceedings take time, require evidence and can be stressful. A negotiated settlement can offer certainty and privacy, but that does not mean the first offer should be accepted without analysis or that every point needs to become a dispute. The aim is a package that properly reflects the risks and priorities on both sides.
Deadlines and pressure to sign
Employers often set a deadline for acceptance. ACAS guidance recommends allowing at least 10 calendar days to consider the written terms of a proposed settlement agreement, although this is guidance rather than an absolute legal rule in every case.
If the deadline is impractical, it may be possible to request more time, particularly where the agreement is complex or you need to take advice. Do not sign simply because you have been told that an offer will be withdrawn. Once signed, the agreement will usually be difficult to reopen.
Employees should also keep an eye on tribunal limitation dates. Settlement discussions do not necessarily stop time running for an employment tribunal claim. Early Conciliation through ACAS can affect limitation periods, but it is vital to obtain advice promptly where a claim may be needed.
How legal advice adds value
The adviser’s role is to explain the legal effect of the agreement, but effective advice should go further. It should identify missing payments, unclear provisions, problematic restrictions and terms that do not reflect what has been agreed in conversation. It should also provide a practical view on whether negotiation is worthwhile.
For employers, obtaining advice during drafting can reduce the risk of an invalid agreement, unclear waiver provisions or promises that are difficult to administer. Clear documents and fair process make a settlement more likely to achieve finality.
Arcos Employment provides settlement agreement advice focused on clear choices, careful negotiation and terms that protect your position. Before signing, make sure the agreement does more than bring a difficult situation to an end – it should leave you with certainty about what comes next.