Offered a settlement agreement? Read this before you sign

A settlement agreement is a legally binding contract in which you give up your right to bring claims against your employer, usually in exchange for a payment. They are common, they are not sinister in themselves, and they are often the cleanest way out of a bad situation. But the first draft is written by your employer's side, and the first offer is rarely the best one available.

What a settlement agreement actually is

Most employment rights cannot be signed away. A settlement agreement is one of the few exceptions, and only if it meets strict statutory conditions: it must be in writing, relate to particular complaints, and you must have received advice from an independent adviser who is identified in the agreement and carries professional indemnity insurance.

That is why your employer will usually contribute towards your legal fees. It is not a favour. Without your adviser's certificate the agreement does not do the one thing your employer wants it to do, which is stop you claiming.

Why you are being offered one

Common triggers are a redundancy your employer would rather not run a full consultation on, a performance or conduct issue they would rather not take through a formal process, a grievance or discrimination complaint they want closed, or simply a relationship that has broken down and needs an exit both sides can live with.

The conversation is often opened as "off the record". Two separate rules sit behind that phrase. Without prejudice protects genuine attempts to settle an existing dispute. Protected conversations under section 111A of the Employment Rights Act allow pre-termination settlement discussions to be kept out of an ordinary unfair dismissal claim even where there is no dispute yet. Neither is absolute. Improper behaviour, and claims such as discrimination or whistleblowing, can put those conversations back in front of a tribunal.

What to check before you sign

• The termination date and notice. Are you being paid your full notice, worked or in lieu, and is accrued untaken holiday included?
• The split of the money. A genuine ex gratia termination payment can currently be paid free of tax up to £30,000. Notice pay is taxable, and HMRC's post-employment notice pay rules stop notice being relabelled as compensation. Check who bears any tax the employer gets wrong, because most drafts put that on you.
• What claims you are waiving. Personal injury you do not yet know about and accrued pension rights are commonly carved out. Make sure anything you actively intend to pursue is not signed away by a blanket clause.
• The reference. Agree the wording and annex it to the agreement, and include who will give it and what they will say if telephoned. A reference promised verbally is worth nothing later.
• Restrictive covenants. Employers often use the agreement to reaffirm or extend post-termination restrictions. If those restrictions affect your next role, this is the moment to negotiate them, not after you have signed.
• Confidentiality and non-derogatory clauses. These are normal, but they cannot stop you reporting a criminal offence, making a protected disclosure to a regulator, or co-operating with a proper investigation. Make it mutual if you can, so your employer is under the same restraint.
• Practical extras. Outplacement support, retention of a laptop or phone, unvested bonus or share awards, private medical cover to a set date, and repayment clauses for training costs or a signing bonus.

Is the money right?

There is no formula, but the sensible way to judge an offer is against what the alternative is worth. That means valuing the claims you would actually bring, discounting them for the risk of losing and for the time and stress of a tribunal, and comparing that against what is on the table now with no risk.

An offer that only covers your notice period is generally not a settlement at all. It is your contractual entitlement dressed up as a deal, and you are being asked to waive real claims for nothing extra.

The picture changes considerably if there is a discrimination or whistleblowing element, because compensation in those claims is not capped in the same way as ordinary unfair dismissal and can include an award for injury to feelings.

Timing and pressure

The ACAS Code on settlement agreements suggests you should have at least 10 calendar days to consider a proposed agreement and take advice. A hard deadline of "we need this signed by Friday" is a negotiating tactic more often than a genuine constraint.

Watch one deadline that is genuine. If negotiations drift, the three months less one day limit for most tribunal claims keeps running. Notifying ACAS to start early conciliation does not blow up the negotiation and it protects your position.

Getting advice without derailing the deal

You do not need to arrive with a fight. In most cases a specialist reads the agreement, tells you plainly whether the money is reasonable for what you are giving up, and sends a short list of measured amendments. Employers expect that, and their own advisers have usually built room into the first draft.

The mistake worth avoiding is signing quickly because you want it over with. The agreement is final, and once your claims are waived they are gone. An hour of proper advice at the start is the cheapest part of the whole process, and your employer is probably paying for it.