Settlement Agreement Clause Explainer: Understand What You Are Signing

Key Points

Why Settlement Agreement Clauses Matter

Most people focus on the money when they receive a settlement agreement. That is understandable, but the clauses matter just as much. A settlement agreement is not just a payment; it is a legal contract that determines what you can and cannot do after you leave, what your employer can say about you, and which legal rights you are permanently giving up.

The language is dense and legalistic. Clauses reference specific statutes, use terms like “without prejudice” and “tax indemnity”, and contain waivers that run to several pages. For someone seeing this for the first time, it can feel overwhelming.

Our clause explainer helps you prepare. It covers the 10 most common clause types in a typical settlement agreement, explains each one in plain English, and highlights the specific things a solicitor would flag as concerns. It is not a substitute for legal advice, but it means you will understand what you are looking at before your solicitor reviews the detail.

The 10 Key Clauses in a Settlement Agreement

1. Termination date and reason for leaving

This clause sets the date your employment officially ends and may state the reason for your departure. The termination date determines when your salary, benefits, and notice period stop. The stated reason can appear on references and affect future job applications.

In most settlement agreements, the reason is described neutrally: “mutual agreement” or “redundancy” rather than anything implying fault. The date should allow sufficient time for the agreement to be finalised, and you should have been given at least 10 calendar days to consider the offer as recommended by the Acas Code of Practice on Settlement Agreements.

Watch out for: a termination date that has already passed (which may reduce your leverage), a reason that could damage future applications, or a date that does not allow for the recommended consideration period.

2. Payments: notice, redundancy, holiday, and compensation

The payment clause lists every financial element of the settlement. Each payment type should be separately identified with a specific amount: salary to the termination date, payment in lieu of notice (PILON), statutory redundancy pay (if applicable), accrued holiday pay, and the ex-gratia or compensation payment.

Separating the payments matters because each one is taxed differently. Notice pay and holiday pay are taxed as earnings. The first £30,000 of qualifying compensation can be tax-free. If everything is bundled into a single figure, it is impossible to check whether each element has been correctly calculated and whether the tax treatment is right.

Watch out for: payments bundled into a single figure without a breakdown, notice pay that is less than your contractual or statutory entitlement, missing holiday pay, statutory redundancy not separately identified, or language suggesting your entitlements are “included in” the compensation rather than paid on top of it.

“I always tell clients to check the payment clause line by line against their contract. Your notice pay, holiday, and redundancy are not favours from your employer. They are legal entitlements. The compensation payment should be on top of those, not instead of them.”

Tom Street Principal Solicitor, Tom Street & Co.

3. Tax treatment and tax indemnity

This clause specifies how each payment will be taxed and almost always includes a tax indemnity. The indemnity means that if HMRC later decides a payment was taxed incorrectly, you promise to reimburse your employer for any additional tax they are required to pay.

Since 6 April 2018, all payment in lieu of notice is taxable as earnings under section 402B of ITEPA 2003, regardless of whether your contract contains a PILON clause. If you are not working your full notice period, your employer must calculate Post-Employment Notice Pay (PENP) under section 402D and tax that amount as earnings too.

Watch out for: payments labelled as “compensation” that are actually earnings in disguise, a tax indemnity with no time limit, no mention of PENP where you have unworked notice, or no breakdown of which payments are taxable and which are exempt.

Use our settlement agreement tax calculator to check the tax breakdown of your offer.

4. Waiver of claims

This is the legal core of the settlement agreement. You agree to give up your right to bring specified employment claims against your employer. This waiver is permanent.

For a waiver to be legally valid under section 203 of the Employment Rights Act 1996, the agreement must relate to “particular complaints” or “particular proceedings.” A properly drafted waiver lists the specific statutes and claim types being waived: unfair dismissal, discrimination under the Equality Act 2010, whistleblowing, breach of contract, and so on.

Certain claims are typically excluded from the waiver: personal injury claims you are not yet aware of, accrued pension rights, and the right to enforce the settlement agreement itself.

Watch out for: extremely broad or generic language that does not list specific statutes (this may not meet the statutory requirements), no carve-out for unknown personal injury claims, no carve-out for accrued pension rights, and no preservation of your right to enforce the agreement.

5. Confidentiality and non-disclosure

Most settlement agreements include a confidentiality clause (sometimes called a non-disclosure agreement or NDA). This restricts what you and your employer can say about the agreement, its terms, and the circumstances that led to it.

Confidentiality should be mutual: both sides agree to keep the terms private. Standard exceptions allow you to discuss the agreement with your immediate family, professional advisers (solicitor, accountant), and HMRC. Crucially, a confidentiality clause cannot prevent you from making a protected disclosure (whistleblowing), reporting criminal offences to the police, or cooperating with regulatory investigations. This is protected by law, and any clause that attempts to override it is void.

From 6 April 2026, sexual harassment will become a qualifying disclosure under whistleblowing law, giving additional protection to employees reporting such conduct.

Watch out for: one-sided confidentiality (you are restricted but your employer is not), no exceptions for telling family or advisers, any attempt to prevent whistleblowing or regulatory reporting, overly broad scope that prevents you from ever discussing your employment experience, and disproportionate penalties for breach.

6. Non-disparagement

This clause means both sides agree not to make negative, critical, or damaging statements about each other. It is closely related to confidentiality but covers a different concern: not what you disclose, but what you say about the other party.

A well-drafted non-disparagement clause is mutual. Your employer should commit not only to avoiding negative statements themselves but also to instructing relevant managers and colleagues not to criticise you. Standard carve-outs should exist for legal proceedings, regulatory disclosures, and honest references.

Watch out for: one-sided obligations (only you are restricted), no commitment from the employer to instruct staff not to disparage you, sweeping social media restrictions without clear definitions, and no carve-out for providing honest answers in future reference contexts.

7. Agreed reference

Your employer agrees to provide specific wording for any future reference request. This is one of the most valuable non-financial elements of a settlement agreement, particularly if you left in difficult circumstances.

The reference should be factual, covering dates of employment, job title, and a brief description of your role. It should be attached as a schedule to the agreement so you can see the exact wording before signing. The employer should also commit to not departing from this wording.

Watch out for: no reference included at all, vague promises without specific wording attached, language that could be read as negative or as “damning with faint praise,” and no commitment that the employer will not provide a different verbal reference from the written one.

8. Restrictive covenants

These clauses limit what you can do after leaving your job: working for competitors (non-compete), contacting former clients (non-solicitation), or recruiting former colleagues (non-poaching). They may already exist in your employment contract, or the settlement agreement may introduce new ones.

If restrictive covenants already exist in your contract, the settlement agreement typically confirms they continue to apply. Any covenants must protect a legitimate business interest and be reasonable in scope and duration. Courts will not enforce restrictions that are wider than necessary.

Watch out for: new restrictions being introduced that were not in your original contract (you should be compensated for agreeing to these), duration longer than 12 months, geographic scope that is unreasonably wide, non-compete clauses so broad they effectively prevent you working in your industry, and existing covenants being widened without additional payment.

9. Return of property and data

You agree to return all company property (laptop, phone, car, access cards) and delete company data from personal devices and cloud storage.

This is usually straightforward, but there are practical considerations. You should have an opportunity to retrieve personal files from company devices before returning them. If you have been using a company mobile number as your personal number, negotiate to keep it.

Watch out for: unreasonable deadlines that do not allow time to back up personal data, overly broad definitions of “company data” that could include your own work portfolio, and no agreement on keeping your mobile phone number.

10. Entire agreement clause

This states that the written settlement agreement is the complete agreement between you and your employer. It replaces all previous discussions, promises, and arrangements. Once signed, verbal promises made during negotiations are unenforceable.

This is standard boilerplate, but it has a significant practical consequence. If your employer made verbal promises during settlement discussions, such as “we will help you find another role” or “you can keep the company car for six months,” those promises must appear in the written agreement. If they do not, they are gone once you sign.

Watch out for: any verbal promise or commitment that has not been written into the agreement. If it was important enough to discuss, it is important enough to include in writing.

“The entire agreement clause catches people more often than any other. Employers make all sorts of promises during settlement discussions. Some are genuine, some are not. The only ones that count are the ones written into the agreement. If it is not on the page, it does not exist.”

Tom Street Principal Solicitor, Tom Street & Co.

Using the Clause Explainer with Our Other Tools

This clause explainer is the third tool in our settlement agreement toolkit. Together, the three tools cover the full picture.

Start with the offer checker to assess whether the financial offer is fair for your situation. Then use the tax calculator to see what you will actually take home after tax. Finally, use this clause explainer to understand what you are signing and what to ask your solicitor about.

None of these tools replace legal advice. They prepare you so that when your solicitor reviews your agreement, you understand the discussion and can ask informed questions about anything that concerns you.