Thinking About a Settlement Agreement?

When managing redundancies, a settlement agreement can appeal to all parties. For employers, it’s a clean, claim-free legal resolution. For employees, it offers a discreet exit and agreed benefits rather than a P45 and an awkward scene. Handled correctly, it provides peace of mind for both, but missing key details can expose employers to legal or financial risk. 

Before offering or finalising any agreement, it’s vital to ensure the terms are watertight and fair, and settlement agreements are no exception. In instances of redundancies, workplace disputes, or performance-related exits, it’s suffice to say there could be some disgruntled parties involved looking for loopholes to expose. To keep things clean and compliant, here are five key checks every employer should make when considering a settlement agreement in 2025.

Clarity of Terms

Whether you’re dismissing an employee or deciding who gets the last doughnut in a pack of three, the key to any fair agreement is clear and precise terms. Employers should ensure every term is precisely defined – from payments and bonuses to notice periods, benefits, and reference wording – or risk disputes later on. A good practice is to double-check that the final document mirrors what was agreed during negotiations. For example, if the employee is being paid in lieu of notice, the agreement should specify this clearly and then confirm how the amount has been calculated. Transparency and clarity protect the employer and the employee alike, shifting the process from a heated argument to a mutually beneficial arrangement.

Scope of Claims Waived

A settlement agreement’s main appeal is, of course, the elimination of any future legal claims; however, there are certain rights for which claims cannot be legally waived, such as those for future personal injury or accrued pension rights. The agreement, therefore, should clearly list which statutory and contractual claims are being waived (such as unfair dismissal or discrimination). Overly broad waivers leave room for exploitation and could even invalidate the agreement altogether. By striking a balance between comprehensive coverage and lawful drafting, employers can ensure genuine finality and overall peace of mind.

Confidentiality and Restrictive Covenants

Most settlement agreements include confidentiality clauses to keep people from gossiping and protect business interests. It’s essential, however, to keep this element realistic and not so broad that it becomes unenforceable. In some cases, employers may also wish to specify restrictive covenants, in which case, the employee should receive further consideration (such as a payment or benefit) for agreeing to it. Examples might include a non-compete clause that prevents the employee from working for a competitor for a given period after leaving, or a non-solicitation clause that prevents the employee from poaching the company’s clients, customers, or staff. 

These restrictions must be reasonable and proportionate, meaning they must… 

• • cover only a fair geographic area 

• • last for a limited time 

• • relate specifically to the employee’s role and what needs protecting 

If handled properly (in other words, if you don’t go overboard with the restrictions), these clauses can help the company to stay protected after the employee leaves and ensures a fair exit procedure for all involved.

Sticking to the Process 

Even the most carefully worded agreement won’t be legally binding unless the process is followed correctly. Employers must allow the employee to seek independent legal advice from a qualified adviser and give them sufficient time to do so. Pressuring an employee to sign quickly or failing to document discussions properly could render the agreement invalid and burn the bridges you were trying to secure. Employers should also ensure these conversations remain discreet and confidential – if they’re keeping quiet, you should too. Liaisons must remain protected, meaning they cannot be used in ordinary unfair dismissal proceedings if discussions break down. A transparent, well-managed process not only safeguards the employer but also demonstrates fairness and respect toward the employee.

Tax and Other Implications

Before you breathe a sigh of relief, we need to talk tax. Ex-gratia payments are generally tax-free up to £30,000, but things such as contractual notice pay and bonuses are taxable through PAYE and will therefore have tax and National Insurance contributions deducted. Clearly outlining the tax status of each payment in the agreement ensures both parties understand what the employee will actually receive. Finally, while logistics like the return of company property, garden leave, and handover responsibilities might seem like the kind of topics that can be discussed over an eye-contact-less coffee in the break room, when specified in the agreement, they help prevent complications later on. 

You can expect every situation like this to be as unique as the individuals involved, so expert advice can be crucial when navigating settlement agreements. Taking these steps reduces the risk of disputes, protects the business and creates a clean break for everyone involved – hold the awkwardness.

To discuss your organisation’s settlement agreements or have one reviewed, speak to one of our Manchester-based employment solicitors today.