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Settlement agreement checklist: 12 things to check before you sign

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What is a settlement agreement? It is the document that turns a redundancy offer into money. It is also the document that ends your right to bring almost any claim against your employer, which is why the law requires you to have independent legal advice before it binds you. Most people read the number on the first page and skim the rest. The rest is where the terms that matter for the next two years of your life are written.

This is a twelve-point checklist for reading one properly, whether you are leaving a large employer through a voluntary programme, a smaller one through a compulsory process, or negotiating an exit for reasons that have nothing to do with redundancy. It is not a substitute for the solicitor the employer is paying for. It is the list of things to make sure the solicitor has looked at, and to raise yourself if they have not.

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What is a settlement agreement, and why the law protects you

A settlement agreement is a legally binding contract in which you agree to waive specified employment claims in return for a payment and other terms. Employers use them because they buy certainty: once signed, you cannot take them to a tribunal for unfair dismissal, discrimination or the other claims listed in it. For that reason the law protects you with three conditions. The agreement must be in writing and relate to specific claims. You must have received advice on its terms and effect from a relevant independent adviser, usually a solicitor, who must be identified in the document and insured. And the employer normally contributes to the cost of that advice, typically a few hundred pounds.

The Acas Code of Practice adds that you should be given a reasonable period to consider the terms, and suggests a minimum of ten calendar days. You cannot be compelled to sign, and refusing to sign is not itself misconduct. What you may lose by refusing is the enhanced payment, since the employer is only obliged to pay your statutory entitlements, so the decision is a trade, not a formality.

"The number on page one is what they are paying. Pages two to twelve are what you are selling. Read them in that order."

The twelve-point checklist

Go through every one before you sign

1. The payment, itemised

Statutory redundancy pay, enhanced or ex gratia payment, notice pay, accrued holiday and any bonus should each appear as a separate figure with its tax treatment. If the agreement shows one lump sum, ask for it to be broken down. You cannot check the tax, or your runway, without it.

2. The tax treatment and the indemnity

Confirm which elements fall within the £30,000 exemption and which are taxed as earnings. Almost every agreement contains a tax indemnity making you liable for any further tax HMRC later demands, so the treatment has to be right before you sign, not argued about afterwards.

3. The termination date and the payment date

The termination date decides your final salary, pension accrual, benefit cover and which year's statutory rates apply. The payment date, often 14 to 28 days after signing or after termination, decides which tax year the money lands in and when you can actually spend it. Both are negotiable.

4. Notice: worked, paid in lieu, or garden leave

Check whether you are expected to work your notice, be paid in lieu, or sit on garden leave still employed. Garden leave keeps your salary and benefits running and can delay when you may start elsewhere; pay in lieu ends employment sooner. Each suits a different plan.

5. The claims you are waiving

The waiver must list specific claims to be effective. Read the list. It should not cover claims you cannot lawfully waive, such as future claims or personal injury you do not yet know about, and your solicitor should confirm that any claim you actually have is being paid for at a sensible price.

6. The reference

Ask for an agreed reference to be attached as a schedule, with the wording fixed, and a clause obliging the employer to give that reference and to say nothing inconsistent with it. A verbal promise of "a good reference" is worth nothing once you have left.

7. Confidentiality and non-disparagement

You will usually be asked to keep the terms confidential and not to disparage the employer. Ask for both to be mutual, so the employer is bound too, and check the carve-outs: you must remain free to speak to your family, your advisers, HMRC and regulators, and to make protected disclosures.

8. Restrictive covenants

Non-compete, non-solicitation and non-dealing clauses from your contract may be restated or even extended. Understand exactly what they stop you doing and for how long, because they shape your plan B. If you intend to consult or contract in the same field, this is the clause to negotiate hardest.

9. Bonus, commission and share awards

Check whether any bonus earned to date will be paid, and what happens to unvested share options or long-term incentive awards. Scheme rules often treat redundancy as a "good leaver" reason that preserves some rights, but the agreement needs to say so.

10. Pension and benefits

Confirm the date pension contributions and benefits such as private medical cover, life cover and any car or allowance stop. If you want part of the payment made as a pension contribution rather than cash, it must be written in here, with the mechanics agreed.

11. Outplacement, equipment and expenses

Outplacement support, keeping a laptop or phone, and settlement of outstanding expenses are all cheap for the employer and useful to you. They are rarely offered unless asked for, and asking costs nothing.

12. The legal fees contribution

Check the amount the employer will contribute towards your advice and whether it is paid directly to the solicitor. If the agreement is complex, or you need advice on negotiation rather than only on the terms, the contribution may not cover it, and you should know that before instructing anyone.

Take the checklist into the meeting

The free PDF guide has the settlement agreement rules, the questions to put to HR in writing, the tax treatment of every element, and a decision formula for the offer as a whole.

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What is negotiable, realistically

In a large voluntary programme the headline sum is often fixed by a formula that applies to everyone, and employers resist changing it because doing so for one person invites the same request from hundreds. But the terms around the sum are frequently open, and they are where most of the value is for the individual. The leaving date, the payment date, the reference wording, mutual confidentiality, the scope of restrictive covenants, a pension contribution instead of cash, and outplacement are all reasonable asks that cost the employer little.

The way to ask is in writing, politely, specifically, and early, ideally through your solicitor once they have reviewed the draft. People who ask reasonably tend to get more than people who do not, and an employer that is paying a premium for certainty has every incentive to close the deal rather than argue about a reference schedule.

Protected conversations and "without prejudice"

You may be handed a draft agreement in a meeting described as "without prejudice" or as a "protected conversation". Both phrases mean that what is said cannot normally be used later in a tribunal claim, which allows both sides to discuss an exit frankly. They do not mean you have to respond on the spot, and they do not mean the offer expires when the meeting ends, whatever the tone suggests. The right answer to any offer made in the room is that you will consider it with advice and respond in writing.

Three mistakes to avoid

Treating the solicitor as a rubber stamp

The employer's contribution is often sized for a quick sign-off. Tell your solicitor what you actually want from the exit, so they advise on the deal rather than only certify that you understood it.

Signing under a false deadline

"We need this back by Friday" is a preference, not a rule. The Acas Code suggests ten days. Ask for the time you need, in writing, and use it.

Ignoring the covenants because you plan to rest

Plans change. A twelve-month non-compete you did not think about can stop the consulting work that turns out to be your best option six months later. Negotiate it now, while you have leverage.

After you sign

Keep the signed agreement, the itemised breakdown and the reference schedule somewhere permanent. Diary the payment date and chase it if it slips. Check the final payslip and P45 against the agreement, because payroll errors on termination payments are common and easier to fix within weeks than months. And if HMRC later queries the tax, the itemised breakdown is the document that settles it.

A settlement agreement is not a hostile document. Done properly, it is the cleanest way to leave, with the money agreed, the reference fixed and the relationship intact. The twelve points above are simply how to make sure the version you sign is the one that works for you rather than only for the employer.