Settlement Agreements: What You're Actually Signing Away

A settlement agreement is not just a receipt for your redundancy pay

Many employees treat a settlement agreement as paperwork that formalises the end of their employment — a document you sign to confirm you have received what you are owed. This is a significant misunderstanding.

A settlement agreement is a legal contract by which you give up your right to bring claims against your employer at an Employment Tribunal or court. In exchange, your employer pays you a sum of money. The claims you waive are typically listed by name in the agreement — and the list is usually extensive.

Once signed, it is final. You cannot come back later if you discover you were underpaid, mistreated, or discriminated against. The whole point of the agreement, from your employer's perspective, is to close that door permanently.

What claims are typically waived?

A standard settlement agreement will include waiver clauses for:

• Unfair dismissal
• Wrongful dismissal
• Statutory redundancy pay claims
• Discrimination (age, sex, race, disability, religion, sexual orientation, pregnancy)
• Whistleblowing claims
• Breach of contract
• Unlawful deduction from wages
• Holiday pay claims

The agreement may also include clauses about confidentiality, non-disparagement, and restrictions on future employment (restrictive covenants). Read every clause carefully.

Independent legal advice is not optional

Under the Employment Rights Act 1996 and the Equality Act 2010, a settlement agreement is only legally valid if the employee has received independent legal advice from a qualified adviser before signing. Without this, the agreement is unenforceable.

Your employer is required to make a contribution to the cost of this advice — typically £300–£500 is stated in the agreement. In practice, a single advice session with an employment solicitor usually falls within or close to this figure.

The solicitor will explain what claims you are waiving, whether the financial terms appear reasonable given your circumstances, and whether any clauses are unusual or particularly restrictive. They cannot tell you whether to sign — that is your decision — but they can make sure you are signing with full understanding.

What is a reasonable figure?

There is no formula. The financial terms of a settlement agreement depend on the strength of any underlying claims, the employer's appetite for risk, and the employee's willingness to negotiate.

Start by knowing your statutory redundancy entitlement — that is the legal minimum your employer must pay regardless of any settlement. Anything the settlement agreement pays above that statutory figure is the settlement premium — the amount that reflects the claims you are waiving.

If you have a strong unfair dismissal claim, for example, the premium should reflect the value of that claim. An employee who was earning £40,000 a year and was unfairly dismissed has a potential tribunal award that could run to tens of thousands of pounds. A settlement agreement that pays only the statutory redundancy figure is not compensating for that claim at all.

See our guide on whether you can negotiate a redundancy package for how to approach the conversation if you believe the offer is too low.

The confidentiality clause

Most settlement agreements include a confidentiality clause preventing you from disclosing the terms — including the amount — to anyone other than your immediate family and legal adviser. This is standard.

Some agreements also include a non-disparagement clause, preventing you from making negative comments about your employer or its staff. These clauses vary in scope. Some are reciprocal (the employer agrees the same). Make sure you understand what you can and cannot say before signing.

What about a reference?

A settlement agreement is an opportunity to agree the terms of a reference in writing. Do not rely on a verbal assurance. If your employer agrees to provide a factual reference confirming your dates of employment and job title, get that confirmation incorporated into the agreement itself, or in a side letter.

When is it worth signing?

If the financial terms are fair, the restrictive covenants are reasonable, and you have no significant outstanding claims, a settlement agreement can bring a clean resolution and remove uncertainty.

If the offer is low, the restrictions are onerous, or there are potential claims that have not been reflected in the payment, those are things to address — through negotiation, or by taking more detailed advice — before you sign.

Whatever you do, do not sign under time pressure without having taken independent legal advice first. Your employer cannot validly require you to sign on the spot, and the agreement itself will not be legally effective if you do.

See our guide on what to do first if you have just been made redundant for the immediate steps before reaching any negotiation stage.