5 Common Mistakes When Signing a Settlement Agreement

Mistake 1: Signing Without Independent Legal Advice

This is the most fundamental error, and it's also the most dangerous. The law requires that settlement agreements include a statement confirming you've received independent legal advice. But some employees misunderstand what this means—they assume the employer's statement is sufficient, or they skip it entirely because they're embarrassed to ask for legal help or worried about cost.

The reality: without proper legal advice, you might not understand what you're giving up. You could waive discrimination claims you don't realise you have. You might accept restrictive covenants that'll damage your future career. You could unknowingly sign away pension rights worth thousands. And if you later discover you should have challenged the settlement, it's often too late.

The solution is straightforward. Obtain advice from a qualified solicitor before you sign. Most employers will cover the cost. If yours won't, it's sometimes worth paying for it yourself—the cost of a few hundred pounds is trivial compared to the potential loss.

Mistake 2: Not Negotiating the Initial Offer

Employees often treat the first settlement offer as a final one. They're emotionally drained from the employment dispute, and they want it over. So they accept what's offered without pushing back.

What they don't realise is that the initial offer is precisely that—a starting point. Almost everything is negotiable: the payment amount, the reference, restrictive covenants, continued benefits, outplacement support, and more. If you don't negotiate, you're probably leaving money on the table.

A skilled solicitor will engage in proper negotiation on your behalf. They'll identify which terms are unreasonable and which have flexibility. They'll prioritise based on your circumstances. For example, if you're worried about future employment, a strong reference might be worth more than an extra thousand pounds in settlement money.

Employers expect negotiation. It's a normal part of the process. By skipping it, you're likely making a costly mistake.

Mistake 3: Accepting Restrictive Covenants Without Scrutiny

Restrictive covenants—such as non-compete clauses, non-solicitation clauses, and confidentiality obligations—often make their way into settlement agreements without proper examination. Employees sign them without truly considering the impact on their future employment.

A restrictive covenant might prevent you from working in your industry for 12 months, or from approaching any clients of your former employer for two years. These can fundamentally damage your career prospects. Yet many people sign them without negotiation.

The law does impose limits on what these clauses can contain—they must be reasonable in scope, duration, and geographic area. Just because something is written into an agreement doesn't mean it's enforceable. Your solicitor will review these clauses and either negotiate more reasonable terms or advise you on whether they'd likely be enforceable if challenged.

Never accept a restrictive covenant without professional review. The damage could follow you for years.

Mistake 4: Overlooking Tax Implications

Settlement payments aren't all treated equally for tax purposes. Some parts are tax-free; others are fully taxable. The way the settlement is structured can mean the difference between keeping an extra £5,000 and paying it away in tax.

For example, a properly structured redundancy payment up to £30,000 is tax-free. But if the employer incorrectly labels it as a wage payment or bonus, it becomes taxable. Damages for discrimination are tax-free, but notice payments and holiday pay are fully taxable.

Many settlement agreements are drafted without proper attention to tax structuring. Your solicitor should liaise with an accountant or tax advisor to ensure the payment breakdown is optimised for your tax position. This is especially important if the settlement is substantial.

Getting the tax treatment wrong is a preventable mistake that costs people real money.

Mistake 5: Not Clarifying What Claims Are Being Released

Settlement agreements release certain claims you might have had against your employer. But what exactly is being released? Is it just the claim that prompted the settlement, or is it broader? Does it include discrimination claims, data protection claims, or claims you haven't yet contemplated?

Many agreements use vague language: "all claims arising from the employment relationship." This is overly broad and potentially unenforceable. Better agreements specify exactly which claims are being settled and which are excluded. For example: "All claims relating to wrongful termination and breach of contract, but excluding claims relating to discrimination, harassment, or unlawful deduction of wages."

If the agreement doesn't clearly specify what's being released, your solicitor should insist on clearer language. You need to understand exactly what rights you're giving up. And you should be aware of any claims that are notably being excluded—that tells you something important about the negotiation.