Quick Answer

Settlement agreement clauses set out the terms of your departure, payment, obligations, and restrictions. Each clause serves a specific purpose. Before signing, you must understand every clause and take independent legal advice.

What Are Settlement Agreement Clauses?

A settlement agreement is a contract containing multiple clauses—each clause is a term or condition that both you and your employer must follow. Some clauses are standard and appear in nearly all settlement agreements. Others are specific to your situation.

The agreement is binding once you sign it (and once you have taken independent legal advice). This means you cannot change your mind later, and neither can your employer. For this reason, understanding every clause is essential before signing.

Below, we explain each standard clause in plain English. If your agreement contains clauses we do not cover, or if you are unsure about any clause, this is exactly what an employment law adviser is for—they will review your specific agreement and explain anything confusing.

1. Termination Date

"The employment shall terminate on [date] by mutual consent with immediate effect."

What it means: This clause sets the date when your employment officially ends. This date is important for calculating notice, holidays, and pension rights. It also determines when restrictive covenants (see below) begin to apply.

What to check: Make sure the date is correct. If the clause says "with immediate effect," it means you finish work on that date. If it says you must work notice, you may continue until that date. Check whether any holiday is paid out or whether you are required to take it before the date.

Key point: The termination date should give you enough time to wrap up work, retrieve personal items, and prepare for departure—typically at least a few days unless you negotiate immediate departure.

2. Termination Payment (Compensation)

"The employer shall pay the employee a sum of £[amount] gross / net within 7 days of the date of signature."

What it means: This is the financial settlement—the amount of money the employer is paying you to end the employment and settle any claims. This is typically the most important part of the agreement.

What to check: Verify the amount is correct and that you understand whether it is gross or net. "Gross" means before tax; "net" means after tax. Usually, agreements specify gross amounts and make clear which portion is tax-free (up to £30,000) and which is taxable.

Check the payment date. Most agreements require payment within 7 days of signature, but some provide longer. Do not sign if you have concerns about the employer's ability to pay. Check also whether the payment includes all outstanding wages, holidays, bonuses, or any other entitlements due—these should be clearly broken down.

Key point: This payment is settlement of your claims. Once paid and signed, you cannot bring further claims for unfair dismissal, discrimination, or any other employment-related matter.

3. Notice

"The employer waives the requirement for the employee to serve notice. The employee shall not be required to attend work after [date]."

What it means: This clause deals with your obligations to serve notice to the employer. "Notice" normally means you must continue working for a period (typically 1-3 months) after announcing you are leaving. This clause usually waives that—it allows you to stop work immediately.

What to check: If this clause waives notice, you will not have to attend work after a certain date. This is usually beneficial—it means you can leave straightaway. However, check whether you are entitled to "garden leave" (paid leave whilst not working) during notice, or whether the termination payment is in lieu of notice.

Key point: Being released from notice is generally a positive thing. It means you can focus on finding new work without remaining tied to your old employer.

4. Restrictive Covenants

"For a period of [12 months] after the termination date, the employee shall not solicit or deal with customers of the employer with whom the employee was concerned during employment."

What it means: Restrictive covenants are clauses that limit what you can do after leaving. Common restrictive covenants include:

Non-compete: You cannot work for a competitor during a specified period (e.g., 12 months).
Non-solicitation (customers): You cannot contact customers you dealt with and try to do business with them.
Non-solicitation (employees): You cannot recruit or attempt to recruit other employees to work for a competitor.
Non-dealing: You cannot supply services to customers you dealt with during employment.

What to check: Restrictive covenants must be reasonable in scope, duration, and geographic area. A 12-month non-compete for a receptionist is likely unreasonable. A 6-month restriction on soliciting customers you dealt with is typically reasonable. Check the length of the restriction (duration), the type of activity restricted (scope), and the geographic area covered.

Important: Restrictive covenants must be no broader than necessary to protect the employer's legitimate business interests. If you believe a restriction is unreasonable (e.g., stopping you working in your field entirely), negotiate to narrow it. An adviser can help assess whether a clause is enforceable.

Key point: Breaching a restrictive covenant can result in legal action by your employer. Understand exactly what you cannot do, and if you plan to work for a competitor or in a similar field, clarify this with your adviser before signing.

5. Confidentiality

"The employee shall not disclose the contents of this agreement, the circumstances of the dismissal, or any confidential information of the employer to any third party."

What it means: This clause requires you to keep the settlement agreement, and often the circumstances of your departure, confidential. You cannot tell people what you were paid, why you left, or details about the settlement.

What to check: Confidentiality clauses should not prevent you from:

Speaking to a lawyer about the agreement
Speaking to a spouse, family member, or trusted adviser
Disclosing information to comply with law (e.g., to HMRC or a court)
Reporting concerns about illegal conduct to appropriate authorities

Key point: Many settlement agreements impose strict confidentiality. Discuss with your adviser whether you can tell your family, accountant, or future employer why you left. In practice, you will usually be allowed to give basic information to family and professional advisers, but the full details of the settlement may need to remain confidential.

6. Warranty (Representations)

"The employee warrants that they are not aware of any other claims which they could bring against the employer."

What it means: A warranty is a statement or promise. This clause requires you to confirm that you are not aware of any other potential claims against the employer—for example, wage theft, health and safety failures, discrimination you haven't yet reported, or other violations.

What to check: Before signing, think carefully about whether there are any other matters you have not yet raised with the employer. If there are, this is the time to raise them and potentially include them in the settlement. If you sign a warranty confirming no other claims exist, and later discover a problem (e.g., unpaid wages), you may have difficulty challenging it.

Common issues: Unpaid wages, unpaid holidays, discrimination you hadn't formally raised, breach of contract, or safety concerns. If you are aware of any of these, discuss with your adviser before signing and ensure they are addressed in the settlement.

Key point: Do not sign a warranty if you are aware of potential claims. Discuss these with your adviser and ensure they are either included in the settlement or the warranty is amended to exclude them.

7. Tax Indemnity

"The employer shall indemnify the employee against any tax liability arising from the termination payment, except to the extent that such liability arises from the employee's own tax position."

What it means: A tax indemnity is a promise by the employer to cover your tax liability if HMRC challenges the tax treatment of the settlement. It protects you if the employer's interpretation of tax rules (e.g., the £30,000 exemption) is later disputed.

What to check: A good tax indemnity will state that the employer will pay any tax due if HMRC challenges the settlement's tax treatment. This protects you from unexpected tax bills. Check whether the indemnity covers interest and penalties, as well as the tax itself.

What if there's no indemnity? If the agreement lacks a tax indemnity, discuss with your accountant or tax adviser the tax implications. HMRC could challenge whether the settlement qualifies for the £30,000 exemption, and you could end up with a tax bill. An adviser can help negotiate an indemnity before you sign.

Key point: A tax indemnity protects you from HMRC challenges. It is usually in your interests to ensure one is included.

8. Reference

"The employer shall provide a reference to the employee's future employer confirming length of service, position held, and dates of employment. The reference shall be factual and not disclose the circumstances of termination."

What it means: This clause sets out what reference the employer will provide. A neutral reference confirms job title, dates, and position only. Some agreements allow references to include performance comments; others restrict references to basic facts only.

What to check: Ensure the reference clause provides what you need for future employment. A reference that simply says "dates of employment 2019-2024" may not be helpful. Ideally, the reference should confirm your job title, responsibilities, and that you left by mutual consent, without disclosing the underlying reasons for the settlement.

Important: Discuss with your adviser what reference you need. If you are moving to a competitive field, future employers may require references addressing your skills and performance. Negotiate a reference that will be helpful without being harmful.

Key point: A good reference is essential for finding new employment. Do not accept a reference that is too vague or that might harm your prospects. Negotiate terms before signing.

9. Waiver of Claims

"The employee hereby waives all claims (whether statutory, contractual, or at common law) arising out of their employment or termination, including but not limited to claims for unfair dismissal, discrimination, breach of contract, and wage claims."

What it means: This is the most important clause. It says that by signing, you give up your right to bring any claim against the employer—past, present, or future. You cannot later claim unfair dismissal, discrimination, breach of contract, or any other employment-related claim.

What to check: The waiver should be clear about what you are giving up. Broad waivers cover "all claims arising out of employment." More specific waivers list particular claims (unfair dismissal, discrimination, breach of contract, etc.).

Critical point: Once you sign and accept payment, you cannot change your mind. You cannot later decide you had a discrimination claim and bring it to tribunal. This is why independent legal advice is mandatory—the adviser ensures you understand what you are giving up and that the settlement is fair value for those claims.

Key point: Never sign a waiver unless you have taken independent legal advice and are confident you are not giving up valuable claims.

10. Legal Fees Contribution

"The employer shall pay the employee's legal fees in obtaining independent legal advice on this agreement, up to a maximum of £[amount]."

What it means: Under section 203 of the Employment Rights Act 1996, you must take independent legal advice before signing. Many employers agree to pay for this advice—they may contribute a fixed amount (£500, £1,000, £2,000) toward your adviser's fees.

What to check: The clause should specify the maximum amount the employer will pay. Ensure this amount is sufficient to obtain proper legal advice. A £500 contribution for a complex case involving discrimination may be insufficient. Discuss fees with an adviser before accepting the employer's limit.

Your right to advice: You have a right to independent legal advice regardless of cost. If the employer's contribution is insufficient, you can pay the difference yourself, or discuss whether the employer will increase the contribution. Many advisers will negotiate flexible fee arrangements.

Key point: Do not let a limited legal fees budget prevent you from obtaining proper advice. If needed, pay additional fees yourself—the additional cost will be worth it if it results in a better settlement.

Other Common Clauses

Return of Property

You must return the employer's property (laptop, keys, access cards, etc.) by a specified date. Check that you are given adequate notice and opportunity to retrieve personal items.

Outplacement Services

The employer may offer career coaching, CV advice, or job search support. These services can be valuable—clarify what is included and how long support lasts.

References to Settlement Agreement

Some agreements include a clause preventing either party from admitting the settlement in legal proceedings. This can be important if litigation later arises.

Severability

This clause states that if one part of the agreement is found unenforceable, the rest remains valid. It protects both parties.

Key Takeaways

•Every clause in a settlement agreement is binding once signed. Take time to understand each one.
•The termination payment and waiver of claims are the most important clauses—ensure they are fair before signing.
•Restrictive covenants must be reasonable in scope and duration—negotiate if they are overly broad.
•Do not sign warranties confirming no other claims exist if you are aware of potential claims.
•A tax indemnity protects you from unexpected tax bills—ensure one is included.
•Negotiate a reference that will be helpful for future employment.
•You must take independent legal advice before signing—this is a legal requirement.

Settlement Agreement Clauses Explained