Settlement agreements are common when leaving a job.

They can protect your interests — if you understand the terms and negotiate well.

This guide explains what settlement agreements are, why legal advice is essential, and how to secure the best possible deal.

A settlement agreement is a legally binding contract between you and your employer. It usually involves you waiving your right to bring claims against your employer in exchange for:

• A financial payment.

• An agreed reference.

• Other negotiated benefits (e.g. bonus payments, garden leave, or continued benefits).

By law, you must obtain independent legal advice for the agreement to be valid.

Employers often use settlement agreements to:

• Avoid lengthy disputes or tribunals.

• Provide a clean break with agreed terms.

• Protect their reputation and minimise risk.

For employees, it can be a way to move on quickly while securing fair compensation.

Most settlement agreements include:

• Compensation payment – usually tax-free up to £30,000.

• Notice period or pay in lieu of notice.

• Confidentiality clauses – preventing disclosure of terms.

• Reference wording – agreed in advance.

• Restrictive covenants – limiting work for competitors.

• Is the financial compensation fair compared to what you might achieve at tribunal?

• Does the agreement affect your ability to work for future employers?

• Are bonuses, commission, or holiday pay included?

• Is the confidentiality clause too restrictive?

• Are you happy with the reference wording?

Solicitors play a crucial role by:

• Reviewing every clause in detail.

• Explaining your rights in plain English.

• Negotiating better compensation and terms.

• Ensuring the agreement complies with legal requirements.

In most cases, employers contribute towards your legal fees for settlement advice.

Settlement agreements are commonly used in:

• Redundancy situations.

• Disciplinary or performance issues.

• Workplace disputes or grievances.

• Senior exits and restructuring.

Settlement agreements can be an excellent way to secure a fair exit package — but only if you fully understand your rights and negotiate effectively. Always take specialist legal advice before signing.

Do I have to accept a settlement agreement?

No — it is entirely voluntary. If you reject it, you may still pursue a tribunal claim.

How long do I have to decide?

Usually at least 10 days, but this can be negotiated.

Will my employer pay my legal fees?

Often yes, at least to cover the cost of reviewing the agreement.

Can I negotiate a higher settlement?

Yes — with legal support, many employees secure better terms.