Settlement Agreement Checklist: 15 Things to Check Before Signing

Settlement agreements are legally binding contracts. Once signed and countersigned, you waive the right to bring employment tribunal claims covered by the agreement — usually all of them. The document is also typically confidential, meaning you cannot discuss the terms with colleagues or on social media. The stakes are high. Take the time to check these 15 points before you sign anything.

1. Is the total payment correct and itemised?

The agreement should set out every element of the payment in a clear, itemised schedule: statutory redundancy pay (if applicable), contractual notice pay or payment in lieu, ex-gratia compensation, accrued holiday pay, any outstanding expenses, and any other sums agreed. Read each line against your contract and any correspondence about the offer. Total the figures yourself. Errors — sometimes accidental, occasionally not — do occur in settlement agreement drafts. Do not assume the number is right because it has been typed into a formal document. If anything is missing or differs from what was verbally agreed, flag it immediately.

2. Is the tax treatment correct — the £30,000 exemption applied properly?

The first £30,000 of a genuine termination payment (ex-gratia compensation for loss of employment) is free of income tax and National Insurance. This exemption must be correctly applied in the agreement — the ex-gratia element should be identified clearly, and the PAYE obligation on amounts above £30,000 should be acknowledged. If the payment is simply described as a lump sum with no breakdown, HMRC may tax the whole amount. Your solicitor should confirm that the structure is tax-efficient and that any employer indemnity clause in the agreement (requiring you to pay tax if HMRC later disagrees with the treatment) is not drafted so broadly as to expose you to unlimited tax risk.

3. Is your notice pay included and correctly taxed?

Notice pay — whether you are working your notice or receiving a payment in lieu — is always fully taxable as employment income. It cannot sit inside the £30,000 exemption. Check that the agreement distinguishes notice pay clearly from the ex-gratia element, and that the correct tax treatment is applied to each. If your employer tries to treat part of your notice pay as a tax-free termination payment, HMRC will reclassify it and the tax liability falls on you under the typical indemnity clause. Notice pay should equal your contractual entitlement — check your contract to confirm the correct notice period and that the calculation uses the right weekly or monthly figure.

4. Are your bonus and commission rights protected?

Accrued but unpaid bonuses and commission can represent a significant sum — and employers sometimes try to withhold them as part of a managed exit. If a bonus or commission payment has already accrued (for example, because a performance period has ended or a deal has closed), you are contractually entitled to it regardless of the termination. Check whether the agreement addresses any outstanding bonus or commission — and whether it waives your right to claim it. If a payment date for a bonus falls after your termination date, the agreement should either bring forward the payment or preserve your right to receive it when due. Discretionary bonuses are more complex — the employer's discretion must not be exercised capriciously or in bad faith.

5. Is the reference wording agreed and attached?

You have no automatic right to a reference in UK law. But in a settlement agreement, you can — and usually should — negotiate one. An agreed reference should be attached as a schedule to the agreement, so there is no ambiguity about what will be provided. The wording should cover at minimum: dates of employment, job title(s) held, a neutral or positive description of performance and conduct, and the reason for leaving (if included, this should reflect the agreed departure narrative). Crucially, check who is authorised to give the reference — it should be a named individual or the HR function, not a line manager who may not know about the agreement. The clause should also confirm that no other reference will be given.

6. Is the waived claims list correct — no surprise omissions or unexpected additions?

Settlement agreements must identify the specific claims being waived to be effective under employment law. The list should be comprehensive — covering unfair dismissal, wrongful dismissal, discrimination claims, breach of contract, and all other statutory rights that are relevant to your circumstances. Read this list carefully. Are there any claims on the list that you have not considered and that might be valuable? Conversely, are there important claims that should be included but are missing? Both errors matter. If a valuable claim — say, a personal injury claim arising from a workplace incident — is not listed, it may not be waived, which could create uncertainty later. But if a discrimination claim with significant value is listed and you sign, it is gone.

7. Are future claims excluded — and is there a personal injury caveat?

Settlement agreements typically waive claims arising out of or in connection with your employment up to the date of signing. They should not — and legally cannot — waive claims that have not yet arisen and that you could not have known about at the time of signing. The most important application of this principle is personal injury: if you have a personal injury claim that arises from your employment but you did not know about it at the time of signing (for example, an industrial disease with a long latency period), that claim should be expressly preserved. Check for a personal injury carve-out in the waiver provisions — it should read something like "save for any personal injury claim of which the employee is not aware at the date of this agreement." If this carve-out is missing, request it.

8. Are restrictive covenants reasonable in scope and duration?

Many settlement agreements include post-termination restrictive covenants — non-compete clauses, non-solicitation provisions, and non-dealing clauses. These restrict what you can do after leaving. Check: are these covenants already in your employment contract, or are they being introduced or extended by the settlement agreement? New or extended restrictions added via a settlement agreement must be supported by separate consideration (for example, an enhanced payment specifically for accepting them). Review the geographic scope, the duration, and the definition of "competition" or "solicitation" — are they reasonable given your role and industry? Overly broad covenants may be unenforceable, but until a court says so, they cast a shadow over your next role. This is worth negotiating carefully.

9. Is the confidentiality clause mutual?

Almost all settlement agreements include a confidentiality clause preventing you from disclosing the terms of the settlement to third parties. This is standard and broadly acceptable. However, check whether the clause is mutual — that is, whether it also binds the employer from disclosing the terms. It should be. Also check the exceptions: you should be permitted to disclose the terms to your immediate family, your solicitor and financial adviser, and to HMRC as required. The clause should not be so wide as to prevent you from disclosing information to a regulator or law enforcement if required. A clause that purports to cover up wrongdoing or breach of law is unenforceable as a matter of public policy, but a well-drafted agreement will make the permitted disclosures explicit.

10. Is the non-disparagement clause mutual?

Non-disparagement clauses prevent you from making negative or derogatory statements about your former employer, its officers, or its products and services after leaving. These are common and understandable. But check whether the clause works both ways — your employer (and its senior management) should be equally prevented from making disparaging statements about you. One-sided non-disparagement clauses that bind only the employee are a negotiating point worth addressing: if you are being asked to silence yourself about your experience, the employer should accept the same constraint. The clause should also be reasonably worded — a prohibition on "any negative statement" could prevent you from giving an honest account of your experience to a future employer asking about your work history, which goes too far.

11. Has the employer agreed to pay your legal fees?

Settlement agreements must be signed off by an independent solicitor or other qualifying adviser — this is a legal requirement for validity. It is standard practice for the employer to make a contribution to your legal costs, typically in the range of £250 to £500 plus VAT for a straightforward agreement. Check that the contribution is stated clearly in the agreement and that it is payable promptly (ideally on the same date as the settlement payment, not 30 or 60 days later). If the agreement is complex or involves significant claims, the employer's standard contribution may be inadequate — you can negotiate a higher figure. Do not let the fee contribution be withheld because you negotiated the terms: it is your entitlement for going through the required process.

12. Is the effective date of termination correct?

The termination date affects multiple important matters: your P45 and tax position, the start date for any post-termination restrictive covenants, your entitlement to claim certain state benefits, your continuity of employment for any future claim purposes, and the period over which any final salary or benefits are owed. Check that the date in the agreement matches what was verbally agreed and that it is commercially practical — for example, that it falls at the end of a month (which simplifies payroll and pension administration), and that it is not so early that it cuts off accruing benefits or notice entitlements before they are fully earned.

13. Is the return of company property list complete and accurate?

Settlement agreements typically require you to return all company property by the termination date. Check the list against what you actually hold — laptop, mobile phone, company credit card, access passes, confidential documents, company car. The list should be accurate and complete. If there is property on the list that you have already returned, or that the employer holds on your behalf (such as files stored on their systems that contain your personal data), flag this. Signing an agreement that says you have returned items you have not (or cannot) return creates a potential breach of contract. Conversely, if you have personal documents or data stored on company systems, negotiate their return or deletion before signing.

14. Are your pension rights protected?

Pension rights are one of the most overlooked areas in settlement agreements. Check that any outstanding employer pension contributions up to the termination date will be made, and that you will receive confirmation of your pension status from the scheme. If you are in a defined benefit (final salary) scheme, the implications of the termination date and any enhanced terms for early leaver status can be significant — take specialist financial advice if the sum involved is material. Settlement agreements sometimes include a "pension augmentation" — an additional payment into the pension scheme which may be tax-efficient (check with your financial adviser). Do not assume pension matters are taken care of just because they are not mentioned in the settlement agreement — their absence may mean they are simply overlooked.

15. Have you had independent legal advice — the legal requirement?

A settlement agreement is only legally binding and effective to waive employment claims if you have received advice from a qualifying independent adviser — usually a solicitor who holds a current practising certificate and professional indemnity insurance. The agreement must identify the adviser by name and confirm that advice was given. The adviser must sign a certificate confirming that they have explained the terms and their effect to you. This is not a box-ticking formality: use the advice session to go through all of the above points. A good employment solicitor will identify issues, suggest amendments, and help you understand what you are giving up. The employer pays the contribution — make sure you use the advice session properly rather than treating it as a rubber stamp.