Settlement agreements — what they are and what to watch for

What it is

A settlement agreement (s.203 Employment Rights Act 1996) is a contract where you waive your rights to bring statutory claims against the employer — usually in exchange for a tax-free termination payment up to £30,000 plus pay in lieu of notice and any contractual entitlements.

It is only binding if a "relevant independent adviser" — almost always a solicitor — has advised you on the terms and signed a certificate. The employer typically pays for that advice (£250-£750 is common).

What to look for

• The amount. Compare to your statutory redundancy, contractual notice, accrued holiday, and any bonus. Is the ex gratia element fair given the circumstances?
• Tax-free portion. The first £30,000 of compensation for loss of employment is tax-free; pay in lieu of notice (PILON) is taxable. The agreement should split these clearly.
• Restrictive covenants. Are they being tightened or extended? Are existing ones being waived?
• References. Is an agreed reference attached? It should be neutral or positive.
• Confidentiality / non-disparagement. These usually run both ways but check.
• Discrimination + whistleblowing claims. Can the agreement validly waive these? Future claims you couldn't know about can't be waived.

Time pressure

Employers often give a deadline of a few working days. That's a negotiation tactic. Ask for an extension if you need one — they almost always say yes.