Signing a settlement agreement is a significant moment, but for many employees, the questions start the moment the ink is dry. When does the money arrive? What are you still obliged to do? What can you say, and to whom? And what does it mean for your next job?
The answers depend entirely on what your agreement says, and getting those details right before you sign makes everything that follows much simpler.
When Does a Settlement Agreement Become Legally Binding?
Once both parties have signed the agreement and a legal adviser has certified that the employee received independent legal advice, the agreement becomes legally binding and enforceable.
Until that point, neither party is committed. Until it is signed, the settlement agreement has no legal effect. If you have signed but your employer has not, or if your solicitor has not yet issued the adviser’s certificate, the agreement is not yet complete.
Once it is binding, the terms are fixed. Your employer is legally obliged to honour every commitment in the agreement, and you are bound by every obligation you have accepted.
Once both parties have signed and the adviser’s certificate is in place, the agreement is complete and enforceable. The settlement agreement finalisation process is more involved than many employees expect. The steps are worth understanding before you get to that point.
What Happens on Your Last Day?
If the settlement agreement brings your employment to an end, your termination date will be specified in the agreement. In most cases, one of the following will apply:
- You will have already left, and the termination date is confirmed retrospectively
- You will be on garden leave up to the termination date, meaning you remain employed but are not required to work
- Your employment ends immediately on signing, with payment in lieu of notice made in place of a working notice period
On or around your last day, you will typically be expected to return company property. This will be laptops, phones, access cards, documents and any other equipment specified in the agreement. Some employers make payment conditional on the return of property, so it is worth checking the agreement carefully.
When Will You Receive Settlement Agreement Payment?
Employers commonly pay your settlement agreement payment within 7 to 21 days of the signed agreement and receipt of the adviser’s certificate confirming independent legal advice. Most employers make the settlement agreement a lump sum within 14 to 28 days of termination or signing, but the timeline should be clearly stated in the agreement.
The payment schedule should be explicit in your agreement. If it is vague or missing, that is something to raise before signing. If the payment is delayed, the employee may have to take legal action to enforce the agreement.
Your total payment is likely to consist of several elements:
- Accrued salary up to and including your termination date
- Payment in lieu of notice (PILON) if you are not working your notice period
- Accrued but untaken holiday pay
- Statutory or enhanced redundancy payment, if applicable
- Ex gratia compensation, the additional sum paid in return for waiving your claims
Each element is treated differently for tax purposes. Understanding the breakdown before you sign matters.
Settlement Agreement Tax: What Will You Actually Receive?
Tax is one of the areas that employees most commonly misunderstand after signing a settlement agreement.
As a general rule, the first £30,000 of ex gratia payments, compensation made over and above your contractual entitlements, can be paid free of income tax and National Insurance. However, not everything in your agreement qualifies for this treatment:
- Salary, holiday pay and bonus owed under your contract are taxable in the normal way
- PILON is fully subject to income tax and National Insurance, regardless of how it is described in the agreement
- Ex gratia compensation up to £30,000 is generally tax-free
- Amounts above £30,000 are subject to income tax at your marginal rate
Many settlement agreements include a tax indemnity clause, which may shift the risk to the employee if HMRC later challenges the tax treatment. This means if the agreement is wrong and HMRC demands additional tax, the employee may be required to reimburse additional tax liabilities. This is a clause that should always be reviewed carefully by your settlement agreement solicitor before signing.
Before You Sign, Make Sure the Numbers Are Correct
Settlement agreements often contain complex tax wording, notice calculations and confidentiality clauses.
Our specialist employment solicitors can review your agreement, explain your rights clearly and negotiate improved terms where appropriate. In most cases, your employer covers our legal fees.
Your Ongoing Obligations After Signing
Signing a settlement agreement does not end all obligations. Several may continue, sometimes for months or years afterwards.
Confidentiality
Most settlement agreements include a confidentiality clause. This typically prevents you from disclosing the financial terms of the agreement to anyone other than close family members and professional advisers. Some clauses are broader and cover the circumstances leading to departure as well.
A confidentiality clause cannot lawfully prevent you from reporting a crime to the police or making a protected disclosure to a regulator. It also cannot prevent you from reporting discrimination or harassment to an appropriate authority. A settlement agreement cannot lawfully prevent an employee from making a protected disclosure.
Non-Disparagement
Many agreements include mutual non-disparagement clauses, which prevent both you and your employer from making critical or damaging statements about each other. This typically covers public statements, social media and, in some cases, comments made to industry contacts or future employers.
Restrictive Covenants
Non-compete clauses typically prevent the employee from working for a competitor for a specified period. Non-solicitation clauses may prevent them from contacting clients or colleagues from their previous employer.
These restrictions should have been negotiated before signing. If they were not, or if you are unsure how they apply to your next role, taking advice after signing, before starting a new job, is sensible.
References and Announcements
Your settlement agreement should specify what reference your employer will provide. This is one of the most practically important terms in the agreement. This is particularly true if you work in a sector where references carry weight.
A well-drafted agreement will include agreed reference wording, confirming dates of employment and job title at minimum. It often includes an agreed statement on performance or reason for leaving. It should also address how your departure will be communicated internally, to clients and publicly, where relevant.
If the reference wording is vague or absent, it can cause real problems when you come to apply for your next role. This is worth checking carefully in the agreement itself.
What Can You Still Claim After Signing?
Once signed in compliance with statutory requirements, the employee is prevented from bringing the claims listed in the agreement. However, the waiver is not unlimited:
- You can only waive claims that are specifically listed in the agreement
- Claims arising from events that happen after the agreement is signed are not covered
- Accrued pension rights cannot be waived
- Personal injury claims that were unknown at the time of signing are generally excluded
- You cannot be prevented from making a protected disclosure or reporting a crime
This last point is relevant if you were involved in a situation that may have amounted to unfair dismissal, whistleblowing or discrimination. Signing a settlement agreement to resolve an exit does not necessarily mean those issues were handled correctly. However, it does mean you have agreed not to pursue them through a tribunal.
Can a Settlement Agreement Be Withdrawn After Signing?
Once both parties have signed and the adviser’s certificate has been issued, the agreement is binding on both sides. An employer is entitled to withdraw a settlement agreement offer if it is not accepted before signing. That is because offers are usually made on a without prejudice basis and are not binding until signed. But once executed by both parties, withdrawal is not straightforward and would likely constitute a breach of contract.
There are limited circumstances in which a signed agreement can be challenged. For example, where the employer made a fraudulent misrepresentation to make you sign. If your employer misrepresented the facts, for example, telling you your job was redundant when it was not. Also, if you have evidence of being replaced, this may constitute fraudulent misrepresentation.
Getting a New Job After a Settlement Agreement
A settlement agreement does not prevent you from working again. In most cases, it does not need to be disclosed to a future employer at all.
However, there are practical considerations to be aware of:
Restrictive covenants, if your agreement contains non-compete or non-solicitation clauses, will affect which roles you can take and which clients or colleagues you can approach during the restriction period.
Continuity of service, employees who move to a new employer will, in most cases, be required to rebuild their service before they can benefit from statutory employment protections such as the right to claim unfair dismissal. Your length of service does not transfer.
References, your agreed reference wording now governs what your former employer will say. If a prospective employer calls for a verbal reference outside the agreed wording, your former employer should refer back to the agreed statement.
Confidentiality, if asked about your departure in an interview, you can confirm that you left by mutual agreement without disclosing the financial terms. You are not obliged to explain the details of what happened.
If Something Goes Wrong After Signing
Once a settlement agreement is signed, disputes can still arise. Common post-signing issues include:
- Late or non-payment, if your employer does not pay within the agreed timeline, you may need a solicitor to send a formal demand or pursue the matter through the courts.
- Reference disputes, if your employer departs from the agreed reference wording, you may have a claim for breach of contract.
- Confidentiality breaches, if your employer makes disclosures that breach the agreement, you may be entitled to damages.
- Restrictive covenant disputes, if your former employer alleges you have breached a non-compete or non-solicitation clause, you should take immediate legal advice.
In all of these cases, your first step is to return to the agreement itself, the precise wording of which governs what each party is entitled to do.
What to Do Before You Sign
If you have not yet signed, you are still in the strongest position to negotiate the terms that will govern everything described above. For guidance on what your employer can offer and what a fair package looks like, see our guide Settlement Agreement from Employer.
Key things to clarify before signing:
- The exact payment breakdown and timeline
- The tax treatment of each element
- The precise reference wording
- The scope and duration of any restrictive covenants
- The confidentiality obligations on both sides
- What happens to any outstanding bonus, commission, share options or benefits
Speak to a Settlement Agreement Solicitor Today
Whether you have already signed and have questions about what comes next, or you are still reviewing an offer and want to make sure the terms are right, our specialist solicitors are here to help. We focus exclusively on employment law and settlement agreements. In most cases, your employer pays our legal fees in full, meaning expert advice costs you nothing.
Get free specialist advice today, and speak to a solicitor
Frequently Asked Questions
How long does an employer have to pay after a settlement agreement is signed?
There is no single legal deadline for how long an employer has to pay after a settlement agreement is signed. However, payment within 7 to 28 days of signing is standard practice. The timeline should be explicitly stated in your agreement. If it is not, or if payment is delayed without explanation, a specialist solicitor can write to your employer on your behalf to enforce the terms.
Do I have to tell a future employer I signed a settlement agreement?
In most cases, no, you don’t have to tell a future employer you signed a settlement agreement. Settlement agreements typically include a confidentiality clause covering the financial terms, but they do not prevent you from working or from applying for new roles. You can tell a prospective employer that you left by mutual agreement without disclosing any further details.
What happens if I breach the confidentiality clause in my settlement agreement?
Breaching a confidentiality clause could expose you to a claim for damages by your former employer. In some agreements, there is a specific repayment clause requiring you to return some or all of the settlement payment if you breach confidentiality. It is important to understand exactly what your confidentiality obligations cover, and to take settlement agreement advice if you are unsure.
