A settlement agreement is a legally binding document that waives your right to bring employment tribunal claims. Once signed, it is extremely difficult to undo. Yet many employees make avoidable mistakes that leave them worse off — financially and professionally. Here are the seven most common errors and how to avoid them.
1. Rushing to Sign Without Reading the Agreement Properly
Employers sometimes create a sense of urgency — implying that the offer will be withdrawn if you do not sign quickly. The ACAS Code of Practice recommends that employees are given at least 10 calendar days to consider a settlement agreement. Do not be pressured into signing before you have taken proper legal advice and understood every clause.
2. Underestimating the Value of Your Claims
Many employees accept the first offer without understanding what their employment tribunal claims might actually be worth. Unfair dismissal compensation can be up to 52 weeks' pay (capped at £115,115 in 2024/25). Discrimination claims are uncapped. If you have a strong claim, your settlement figure should reflect that. A solicitor can give you a realistic assessment.
3. Overlooking Restrictive Covenants
Post-termination restrictions — preventing you from working for competitors, poaching clients, or soliciting colleagues — are commonly included in settlement agreements. Many employees sign without realising the restrictions are wider than those in their original contract, or that they may be unenforceable. A solicitor will review these clauses and advise on whether they can be narrowed.
4. Ignoring the Confidentiality Clause
Most settlement agreements include a confidentiality clause preventing you from disclosing the terms of the agreement or the circumstances of your departure. Breaching this clause can expose you to legal action and require you to repay the settlement. Read the confidentiality provisions carefully — and check whether they are mutual (binding on your employer as well as you).
5. Failing to Negotiate the Reference
An agreed reference is one of the most valuable elements of a settlement agreement — yet many employees forget to negotiate it. A positive, specific reference can make a significant difference to your next job application. Insist that the agreed reference is attached as a schedule to the agreement, not just promised verbally.
6. Not Checking the Tax Treatment
The first £30,000 of a genuine ex-gratia payment is tax-free, but payments in lieu of notice (PILON) and contractual payments are always taxable. Some employees are surprised to find that their net payment is significantly less than the headline figure. Your solicitor will explain the tax treatment of each element before you sign.
7. Using the Employer's Suggested Solicitor
Your employer may suggest a solicitor for you to use. You are under no obligation to follow that suggestion. The legal requirement is that your adviser is independent of your employer. Using a solicitor with an existing relationship with your employer may mean you receive less robust advice. Choose your own independent solicitor.
PDA Law provides fixed-fee, genuinely independent settlement agreement advice. We will review every clause, advise on the tax treatment, and negotiate improvements where appropriate.