Settlement agreements UK: what to check before you sign

A settlement agreement is a legally binding document that ends your employment and waives your right to take claims to tribunal in exchange for a payment. Before you sign anything, you need to understand exactly what you are giving up, what you are receiving, and what is negotiable, because the first draft your employer sends is rarely the best deal available to you.

Most people are handed a settlement agreement with ten days to decide and a solicitor appointment booked for day eight. They spend seven days anxious about a document they cannot read. This guide covers every clause you should check, what each one actually means, and the questions you should raise before you agree to anything.

Key Takeaways

• A settlement agreement must meet specific legal conditions under the Employment Rights Act 1996 to be valid, including independent legal advice from a named, insured adviser.

• The ACAS Code of Practice says you should be given a minimum of ten calendar days to consider the terms; pressure to sign faster can amount to improper behaviour by your employer.

• The £30,000 tax-free threshold applies to genuine compensation payments, but PILON (payment in lieu of notice) is always taxable after the 2018 PENP rule changes.

• Several claims can never be waived in a settlement agreement, including personal injury claims not yet known and accrued pension rights.

• Your solicitor confirms you understand the terms; they will not always tell you whether the offer is fair or what you could secure at tribunal. Go into that appointment with specific questions.

• Uploading a settlement agreement to a generic AI chatbot may breach the confidentiality clause in the agreement itself before it has even been signed.

What a settlement agreement is (and what it isn't)

A settlement agreement is a legally binding contract between you and your employer. In exchange for a financial payment (and sometimes other benefits), you agree to waive specific employment claims you have or might have against them. You cannot take those claims to an employment tribunal once you sign.

Until 2013, they were called compromise agreements. You may still see that term in older documents or advice.

When employers use them:

• Redundancy situations where the employer wants a clean break

• Dismissal or performance processes they want to resolve without tribunal risk

• Relationship breakdowns between an employee and the business

• After a grievance or disciplinary process

• When a senior employee is exiting with a negotiated package

The important thing to understand: signing is voluntary. Your employer cannot force you to accept a settlement agreement. If you do not sign, the underlying employment process continues, but you retain all your legal rights, including the right to go to tribunal if you are dismissed unfairly.

The legal conditions that make it valid

A settlement agreement that does not meet the requirements of section 203 of the Employment Rights Act 1996 is not legally binding. This protects employees, but it also means you need to check that the conditions are met before you sign.

The agreement must:

1. Be in writing (no verbal settlement agreements)

2. Relate to specific, named complaints or proceedings, a blanket "waiver of all claims ever" is not valid

3. Confirm that you have received independent legal advice from a relevant independent adviser

4. Identify that adviser by name

5. Confirm the adviser holds professional indemnity insurance

6. State that the statutory conditions for a valid agreement have been met

The ACAS Code of Practice says you should be given a minimum of ten calendar days to consider the proposed terms as a general rule. A shorter period can be agreed, but pressure to sign faster can amount to improper behaviour, which costs the employer the legal protection that normally keeps settlement discussions out of tribunal evidence. If you are being pressured to sign faster, that is a concern worth raising.

The conversations leading to the agreement are usually protected from being used as evidence in tribunal proceedings. "Without prejudice" privilege applies where there is an existing dispute. Where there is not, the section 111A protected conversations provisions keep pre-termination negotiations out of evidence, but only for ordinary unfair dismissal claims: they do not shield the discussions in discrimination, whistleblowing, or automatically unfair dismissal claims, and the protection is lost if the employer behaves improperly. None of this means the final signed agreement is confidential by default, a separate confidentiality clause covers that.

What you are giving up: the waiver clause

The waiver clause is the most important part of the agreement. It lists the claims you are agreeing not to pursue. Read it carefully.

Claims you will typically waive:

• Unfair dismissal (section 94 ERA 1996)

• Wrongful dismissal / breach of contract

• Discrimination claims under the Equality Act 2010 (age, sex, race, disability, religion, sexual orientation, pregnancy)

• Claims for holiday pay, unlawful deduction from wages

• Redundancy payment disputes

• A long tail of specifically listed statutory claims arising from your employment or its termination (agreements typically enumerate these individually rather than relying on catch-all wording)

Claims that cannot be waived:

• Personal injury claims not yet known or not yet reasonably discoverable at the date of signing

• Accrued pension rights

• Claims to enforce the settlement agreement itself (you can always sue if they fail to pay)

• Statutory rights that cannot be contracted out of by law

This is why the specific wording of the waiver matters. If the claims listed are vague or overly broad, that can actually work against validity. If specific known claims you were considering are absent from the list, ask why.

When Elena, a marketing manager in Bristol, received her settlement agreement following a restructure in early 2025, the waiver listed unfair dismissal and breach of contract but made no mention of a pregnancy-related discrimination complaint she had raised three months earlier. Her solicitor flagged this. The omission was not accidental. The employer added it to the final version, and Elena used that leverage to negotiate an increase in the ex gratia payment before signing.

Your settlement agreement checklist: what to check clause by clause

This is what to review before your solicitor appointment. Go through each item and note anything you do not understand or disagree with, so you can raise it in those 45 minutes rather than spend them getting up to speed.

If you want to arrive at that appointment already familiar with the document, Ookulli's AI contract review can give you a plain-English breakdown of each clause before you walk in, based on UK law, with no document retention.

1. The termination date

Does it match your contractual notice period? If you are being paid in lieu of notice (PILON), is that reflected in the payment breakdown?

2. The payment breakdown, itemised

The agreement should separate out:

• Statutory redundancy payment (if applicable)

• Notice pay or PILON

• Outstanding holiday pay (accrued but untaken)

• Any ex gratia or enhanced payment

Each element has different tax treatment. An agreement that lumps everything into a single "termination payment" figure is a red flag.

3. Tax treatment and the £30,000 threshold

Genuine compensation for loss of employment can be paid free of income tax and National Insurance up to £30,000. Above that threshold, standard tax rates apply.

However, PILON is always fully taxable, regardless of how it is labelled. The 2018 Post-Employment Notice Pay (PENP) rules changed this. Before 2018, some employers labelled PILON as "ex gratia" to bring it inside the tax-free threshold. That no longer works. If your agreement does not correctly categorise the PILON element, you could receive a tax bill later that you were not expecting.

4. The waiver clause

As covered above: are the specific claims listed? Is anything missing that should be there? Is any wording so broad that it purports to waive rights you cannot legally waive? For a deeper explanation of how to spot risky clauses in a contract before your appointment, that guide walks through the patterns to look for.

5. The reference

A verbal promise of a good reference from your manager is worth nothing once you sign. The reference must be agreed in writing and, ideally, annexed to the settlement agreement as a draft letter. Check: is the reference factually accurate? Does it cover the role and responsibilities you want highlighted? Will it be given by someone who actually knows your work?

6. The confidentiality clause

Most settlement agreements include a confidentiality obligation preventing you from disclosing the existence or terms of the agreement. Check:

• Who you are permitted to tell (typically: your spouse or partner, your legal adviser, HMRC)

• Whether the obligation is proportionate and time-limited

• Whether the clause is mutual (it should prevent the employer from disclosing terms too)

One thing confidentiality clauses cannot do: prevent you from making a protected disclosure (whistleblowing) under the Public Interest Disclosure Act 1998. They also cannot prevent you from reporting criminal conduct to the police, certain regulators, or named regulated professionals under the Victims and Prisoners Act 2024. If your agreement contains wording that appears to restrict either, that wording is unenforceable.

7. The non-derogatory clause

This prevents either side from making negative or damaging statements about the other after the agreement is signed. Check whether it is mutual. Many employer-drafted agreements include a non-derogatory obligation on you but not on the employer. Ask for it to be made mutual. Most employers will agree.

8. Restrictive covenants

If your contract included post-termination restrictions (non-compete, non-solicitation, non-dealing clauses), check whether the settlement agreement attempts to add new restrictions or to widen existing ones. It sometimes does.

You are not obliged to accept new or wider restrictions in a settlement agreement. Your existing restrictions carry over; new ones require separate consideration to be enforceable. If a restriction is broader than what was in your original contract, push back.

9. The entire agreement clause

This is the clause that catches people out most. An entire agreement clause states that the written document represents the complete agreement between the parties and supersedes all prior discussions, assurances, and representations.

In practice: if your line manager promised you a bonus, if HR told you verbally that you could keep the company car for a month, if anyone made any commitment that is not in the written agreement, those commitments disappear the moment you sign. Get everything in writing, specifically in the agreement, before you execute it. Do not rely on email trails or messages you received before signing.

10. Payment date and method

When will the money arrive? Bank transfer on the termination date? Within ten working days? Some agreements specify 28 days after signing, which is longer than many people expect. Confirm this before signing, especially if you have financial commitments tied to your leaving date.

What is negotiable (more than you think)

The first draft your employer sends is a starting position. It is drafted in their interests, not yours. Most elements are negotiable.

Concrete things to push on:

• Payment amount: The ex gratia element especially. If your employer is avoiding tribunal risk, that risk has a value. A solicitor can advise on what tribunal claims might be worth, and employers know this.

• Mutual non-derogatory clause: If the draft only binds you, ask for it to be mutual. This is a standard request and is rarely refused.

• Reference wording: Do not accept a brief "confirm dates and job title only" reference if you want a substantive one. Negotiate the text and have it annexed.

• Restrictive covenants: Ask for the notice period element to count toward the restriction period. Ask for the geographic scope or scope of activities to be narrowed. Ask whether any restrictions can be removed entirely given the circumstances of departure.

• PILON as an immediate lump sum: If you are on garden leave, ask whether the notice payment can be brought forward.

• Benefits continuation: Health insurance, company car, share options, and similar benefits can sometimes be extended or vested early. These are often forgotten in negotiations because employees focus on the headline cash figure.

• Contribution to legal fees: Your employer will typically offer a fixed contribution (commonly £300 to £600 plus VAT) toward your legal advice costs. If your agreement is complex, that may not cover the full fee. It is reasonable to ask for a higher contribution.

What independent legal advice actually covers, and what it doesn't

The law requires that you receive independent legal advice as a condition of the agreement's validity. Your employer will typically nominate a firm or offer a contribution toward your costs.

The "relevant independent adviser" does not have to be a solicitor: a barrister, a certified trade union official, or a certified advice centre worker also qualifies. If you are a union member, this advice is often available free through your union. A solicitor is the most common route, so this guide says "solicitor" throughout, but it is not the only one.

What the solicitor must do: confirm you have been advised on the terms and effect of the agreement, and sign a certificate to that effect.

What the solicitor is not obligated to do: tell you whether the financial offer is fair, whether you have a strong tribunal claim, or whether you would do better by rejecting the agreement. In practice, many solicitors will give you a view, but not all do, and the scope of work your employer is paying for does not require it.

Make the appointment count. Go in prepared:

• Write down every clause you do not understand

• Note every term that differs from what you were told verbally

• Ask directly: "Is this payment within the normal range for a case like mine?"

• Ask: "Are there any claims I might have that are not listed in the waiver?"

• Ask: "Are there any clauses here that are unusual or that you would push back on?"

You can also use an AI contract review tool to understand the document before that appointment, to identify which clauses need questioning and what the standard positions look like. The independent legal advice requirement is a legal condition the agreement cannot be valid without, so that step cannot be skipped. But arriving at your appointment already familiar with the document means you get more from the time you have.

If you are considering using a tool like that, be careful about which one. Uploading a settlement agreement to a general-purpose AI chatbot, such as ChatGPT or Gemini, carries a specific risk: the confidentiality clause in the agreement may already restrict disclosure of its contents, and uploading to a third-party tool with data retention policies may constitute a breach of that clause before you have even decided whether to sign. For more on this, see why you shouldn't upload contracts to ChatGPT and how to use AI to review contracts safely.

What happens if you don't sign

Not signing is a legitimate choice. It is not a failure to negotiate or a confrontational act. It is you retaining your legal rights.

If you decline:

• You keep the right to bring employment tribunal claims (subject to limitation periods: three months from the act complained of for most claims, rising to six months where the act or dismissal occurs on or after 1 October 2026, with breach of contract claims staying at three months)

• You lose the enhanced payment the employer was offering

• The employer can proceed with whatever the underlying process was: redundancy, dismissal, or performance management

• The settlement discussions typically cannot be used in tribunal proceedings, so declining does not usually put you at a disadvantage evidentially (though as covered above, that protection is narrower for discrimination and whistleblowing claims)

The pressure employees feel to sign is real, but it is not the same as a legal obligation. If the offer is poor relative to the strength of your claims, if the restrictive covenants are unacceptable, or if the confidentiality terms are unreasonable, declining and instructing a solicitor to pursue your claims may produce a better outcome.

James, a software engineer made redundant from a fintech firm in late 2024, was offered a settlement of just over £8,000. He declined on his solicitor's advice, citing a strong age discrimination claim that had not been listed in the waiver. Eleven weeks later, he settled at tribunal conciliation for £21,500. The outcome is not guaranteed to go that way, tribunal proceedings carry risk and take time, but the point is: not signing is a decision you can make.

Can you use AI to review a settlement agreement?

Yes, with the right tool and the right understanding of what it can and cannot do.

What AI can do:

• Summarise the key terms in plain English

• Flag unusual or one-sided clauses

• Explain what specific legal concepts mean (PILON, PENP, entire agreement clause, restrictive covenant)

• Help you generate questions to take to your solicitor

• Check whether the waiver clause is unusually broad

What AI cannot do:

• Replace the independent legal advice requirement, an AI tool cannot sign the certificate the law requires

• Tell you what your specific claims might be worth at tribunal

• Apply the nuance that a specialist employment lawyer brings to a complex factual situation

The privacy issue is real. Generic AI tools, ChatGPT, Claude, Gemini, and others, handle uploaded documents in ways that may conflict with the confidentiality clause in your settlement agreement. Most settlement agreements restrict disclosure of their contents to named categories of person (your legal adviser, your spouse). Uploading to a third-party chatbot is arguably a disclosure outside those categories, and it may happen before the agreement is even countersigned. For a deeper explanation of why AI gets contract review wrong, and why jurisdiction matters more than most people realise, that article covers the mechanics in full.

A specialist tool built for UK contract review, with data privacy by design and no document retention, is a different proposition to a general-purpose chatbot. Ookulli is built for exactly this use case: understanding what your settlement agreement says, in plain English, based on UK law, before you sign anything.

Frequently asked questions

Do I have to accept a settlement agreement?

No. A settlement agreement is voluntary. You cannot be forced to sign one. If you decline, the employer proceeds with whatever the underlying process was, redundancy, dismissal, or performance management, and you retain all your employment rights, including the right to bring tribunal claims. The decision is entirely yours.

How long do I have to consider a settlement agreement?

The ACAS Code of Practice says you should be given a minimum of ten calendar days to consider the agreement before signing as a general rule. Pressuring you to sign faster can amount to improper behaviour on your employer's part. In practice, many negotiations take longer. You can always ask for more time, and most employers will agree.

Is the payment in a settlement agreement tax free?

Partly. Genuine compensation for loss of employment can be paid tax-free up to £30,000. However, PILON (payment in lieu of notice) is always fully subject to income tax and National Insurance under the 2018 PENP rules, regardless of how it is labelled in the agreement. Outstanding holiday pay is also taxable. The tax treatment of each element depends on correct itemisation, a lump sum figure without a breakdown is a problem.

What happens if I don't sign a settlement agreement?

You retain your legal rights, including the right to bring employment tribunal claims. You will not receive the enhanced payment the employer was offering. The employer will typically proceed with the underlying employment process. The without prejudice discussions that took place cannot generally be used against you in tribunal.

Can a settlement agreement stop me from reporting wrongdoing?

No. Confidentiality clauses in settlement agreements cannot prevent a protected disclosure under the Public Interest Disclosure Act 1998 (whistleblowing). Any clause that purports to prevent you from reporting concerns to a regulator, law enforcement, or an appropriate body is unenforceable, and the Victims and Prisoners Act 2024 puts this beyond doubt for reporting criminal conduct. If your agreement contains wording that appears to restrict whistleblowing, challenge it before you sign.

Is a settlement agreement the same as redundancy?

Not exactly. Settlement agreements are used in redundancy situations, but they are also used in dismissal cases, dispute resolutions, and negotiated exits. In a genuine redundancy, you would normally receive a statutory redundancy payment as part of the package. A settlement agreement formalises the exit and waives your right to dispute the redundancy or bring related claims, but the redundancy itself may or may not have been fair, and the settlement is how both parties avoid testing that in tribunal.

Before you sign anything

A settlement agreement is not a formality. It is a document that permanently ends your right to bring employment claims against your employer. The ten days you have to consider it are there for a reason.

Use that time well. Read the agreement yourself, clause by clause. Note anything that does not match what you were told verbally. Check the payment breakdown, the waiver clause, the reference terms, and the restrictions. Arrive at your solicitor appointment with specific questions, not a blank page.

If you want to understand what the document actually says before that appointment, Ookulli can give you a plain-English summary of your settlement agreement, flag the clauses that warrant attention, and help you prepare the questions that will make your legal advice appointment genuinely useful. Your first contract review is free, then £10 per document, with a 30-day money-back guarantee, details at ookulli.com/pricing. Your documents stay private, your analysis is based on UK law, and you walk into that appointment informed.

The employer had a solicitor draft this agreement. You deserve to understand it.

Review your settlement agreement with Ookulli

This article provides general information about UK employment law and settlement agreements. It is not legal advice. You must obtain independent legal advice from a qualified solicitor before signing any settlement agreement.