Key Clauses Every Settlement Agreement Should Include

A settlement agreement contains important clauses covering your payment, legal claims, confidentiality, references, and other employment rights. Some clauses determine how much you receive and when you are paid. Others can affect what you can say, future claims and even your next job.

Understanding each clause is therefore important before signing.

What Clauses Should a Settlement Agreement Include?

Every settlement agreement should clearly outline the payments due to the employee on termination.  These commonly include:

  • Settlement and termination payments
  • Waiver of legal claims
  • Confidentiality
  • Employment references
  • Non-derogatory statements
  • Restrictive covenants
  • Tax
  • Legal fees
  • Employee and employer obligations

A settlement agreement must also meet specific legal requirements to be legally valid. This includes identifying the particular claims being settled and obtaining independent advice. 

Settlement Agreement Payment Clauses

Every settlement agreement should clearly outline the payments due to the employee.

These clauses should explain:

  • The total compensation payable
  • How different payments are calculated
  • When each payment will be made
  • Any conditions that must be met before payment

For example, you may need to return company property before receiving certain payments. The agreement should also distinguish between payments you are already owed and additional settlement compensation.

This can include salary, holiday pay, notice pay and redundancy pay.

Settlement Agreement Tax Clauses

The tax clause explains how the different payments are expected to be taxed. This matters because not every settlement agreement payment is tax-free.

Salary, holiday pay, bonuses and notice pay are generally subject to income tax and National Insurance. Certain qualifying termination payments may benefit from the £30,000 tax exemption.

Get in touch with our settlement agreement solicitors to check how the payments have been described and explain the potential tax consequences.

Waiver of Claims in a Settlement Agreement

One of the most important clauses is the waiver of claims. By signing the agreement, you agree not to bring the particular legal claims covered by the settlement.

These could include claims relating to:

However, simply stating that an agreement settles “all claims” is not sufficient to waive statutory employment claims. The particular claims being settled must be identified. Some rights and claims may also be specifically excluded from the waiver.

Your solicitor should therefore explain exactly which rights you are giving up before you sign.

Confidentiality Clauses in Settlement Agreements

Settlement agreements often include a confidentiality clause, sometimes called a non-disclosure agreement or NDA.

However, confidentiality clauses are voluntary and do not have to appear in every settlement agreement. Current ACAS guidance says they should only be used where necessary.

A confidentiality clause may restrict what can be disclosed about:

  • The existence of the settlement agreement
  • The amount of compensation
  • The terms of the agreement
  • The circumstances surrounding the dispute or departure

The wording should clearly explain what you can disclose and who you can speak to.

Confidentiality is not absolute. For example, an agreement cannot lawfully prevent protected whistleblowing or reporting a crime to the police.

Your solicitor should check that any confidentiality restrictions are clear and appropriate.

Non-Derogatory Statements Clauses

A non-derogatory statements clause can restrict the employer and employee from making damaging or disrespectful comments about each other.

This can apply to written and verbal communications.

For an employee, the clause can be particularly important for protecting their professional reputation after leaving.

Where appropriate, your solicitor may seek wording that places obligations on both sides rather than only restricting the employee.

Employment Reference Clauses

A settlement agreement provides an opportunity to agree what your employer will say about you to future employers.

The agreed reference is often attached to the settlement agreement as a schedule.

This gives you greater certainty about what prospective employers will be told.

If you are unhappy with the proposed wording, your solicitor may be able to negotiate a more suitable reference.

A good settlement is not always about increasing compensation. Securing an agreed reference can be equally important for your next career move.

Restrictive Covenants in Settlement Agreements

Restrictive covenants can affect what you are allowed to do after leaving your employer.

For example, they may restrict you from:

  • Working for certain competitors
  • Approaching former clients
  • Soliciting employees
  • Using confidential business information

A settlement agreement may preserve restrictions already contained in your employment contract. It could also amend or remove them.

These clauses deserve careful attention because they can affect your ability to move into your next role.

Legal Fees for a Settlement Agreement

Your agreement will usually state whether your employer will contribute towards the cost of obtaining independent legal advice.

Employers are not legally required to pay this contribution. However, ACAS recommends that employers consider doing so.

Where an employer pays qualifying settlement-related legal costs directly to your solicitor, those payments can generally be made without tax or National Insurance.

We will always provide advice within the fee limit agreed with your employer. In some cases, an additional charge may apply if you require further negotiation or representation, but we will always seek your express permission before any additional work is undertaken.

Are Settlement Agreements the Same as Redundancy?

No. Settlement agreements are often offered during redundancy, but a settlement agreement and redundancy are not the same thing.

Redundancy is a potential reason for ending employment. A settlement agreement is a legal contract used to settle specified claims or agree terms.

You can therefore be made redundant without signing a settlement agreement.

Likewise, a settlement agreement can be offered for reasons unrelated to redundancy.

Does a Settlement Agreement Mean You Have Been Dismissed?

Not necessarily.

Settlement agreements are commonly used when employment is ending. However, they can also resolve a workplace dispute while the employee remains employed.

Where employment is ending, the agreement should make the arrangements clear.

For example, it may deal with your termination date, notice, outstanding holiday and how your departure will be described.

If the reason for leaving matters to your future career, discuss the wording with your solicitor.

Why Do You Need Independent Legal Advice on a Settlement Agreement?

You must receive advice from a relevant independent adviser for a settlement agreement to validly waive the relevant statutory claims.

The adviser must explain the terms and effect of the proposed agreement. They must also explain how it affects your ability to pursue the relevant claims.

But good settlement agreement advice should go further than simply explaining the document.

Your solicitor should understand the circumstances that led to the offer. They can then identify potential claims and assess whether the overall package is fair.

Sometimes there is genuine value in negotiating better terms. In other cases, the offer may already be reasonable.

The important thing is understanding which applies to your situation.

Have You Been Offered a Settlement Agreement?

Before signing, make sure you understand what you will receive and which rights you will give up.

Our specialist settlement agreement solicitors can review your agreement and explain every important clause in plain English.

Where there is genuine value in negotiating, we can also help you seek improved financial or non-financial terms.

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Frequently Asked Questions About Settlement Agreement Clauses

What Is the Most Important Clause in a Settlement Agreement?

There is no single most important clause.

The payment and waiver of claims clauses are particularly significant because they determine what you receive and which claims you give up.

References, confidentiality and restrictive covenants can also have long-term consequences.

Can I Negotiate Clauses in a Settlement Agreement?

Yes. Settlement agreements are voluntary and their proposed terms can be negotiated.

Negotiation could involve compensation, reference wording, confidentiality, restrictive covenants or other terms.

However, not every agreement needs negotiating. Your solicitor should identify whether changing the proposed terms would genuinely benefit you.

Does Every Settlement Agreement Have a Confidentiality Clause?

No. A confidentiality clause is not legally required.

If one is included, it should clearly explain what information is confidential and any permitted disclosures. Confidentiality clauses also cannot lawfully prevent certain disclosures, including protected whistleblowing.